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F 



INDUSTRIAL AMERICA 



INDUSTRIAL AMERICA 



Berlin Xectutes of 1906 



BY 



J. LAURENCE LAUGHLIN, PH.D. 

i \ 

Professor and Head of the Department of Political Economy in the 

University of Chicago: Author of "Principles of Money," 

"History of Bimetallism in the United States," 

"Elements of Political Economy," 

"Reciprocity," etc. 



WITH MAPS AND DIAGRAMS 



NEW YORK 

CHARLES SCRIBNER'S SONS 

1906 



(U T] 



uO 



UBRARY o» CONGRESS 
Twc Oowe* Received 

OCT 3 1906 

CLASS <y AAC- No, 
COPY A. 



0& M 






Copyright, 1906, by 
CHARLES SCRIBNER'S SONS 

Published, September, 1906 



TKOw DIRECTORY 
INTINQ ANO BOOKBINDING COMPANY 
NEW YORK 



• 



f 



TO 

A. L. and A. M. C, 



PREFACE 

In connection with the interchange of professors 
between Germany and America, in which the 
German Emperor has taken an interest, the 
author was invited by Director Althoff, of the 
Cultus-Ministerium, to deliver a course of lect- 
ures in the spring of 1906 before the Vereinigung 
jur Staatswissenschajtliche Foribildung, in Berlin. 
Lectures from this course were also given in the 
Gilrzenich in Cologne and before the students 
of the University of Berlin. To German audi- 
ences the German language was used. It was 
suggested that these lectures should deal with 
the industrial problems which are at present 
occupying public attention in the United States. 
Although time and space create obvious limita- 
tions to any detailed exposition of each subject, 
an honest attempt has been made to present to 
non-specialist hearers such an impartial account 

vii 



PREFACE 

of the situation as an inquiring foreigner might 
find instructive and important. 

While these studies were prepared directly for a 
German audience, it is thought that possibly they 
may be useful to readers in this country, who 
may wish to inform themselves upon the pivotal 
issues of the day, and yet who may have no time 
to give to an exhaustive course of reading. 

Acknowledgments are due to Messrs. D. Apple- 
ton and Company, and to Professor Johnson for 
the use of several maps showing the grouping of 
railways in the United States, taken from " Railroad 
Transportation." 

J. Laurence Laughlin. 

University of Chicago, 1906. 



vill 



CONTENTS 

CHAPTER PAGE 

I. American Competition with Europe . . i 

II. Protectionism and Reciprocity . ... 33 

III. The Labor Problem 6) • 

IV. The Trust Problem 100 

V. The Railway Question 140 

VI. The Banking Problem 184 

VII. The Present Status of Economic Think- 
ing in the United States . . . .222 

Index 257 



DIAGRAMS AND MAPS 



FACING 
PAGE 



Wages of Unskilled Labor, 1 850-1 900 . . . . 70 

Map Showing Railway Basing Points 154 

The Vanderbilt Group 178 

The Pennsylvania Group 180 

The Gould Group 180 

The Hill Group 182 

The Harriman Group 184 

Various Media of Exchange in the United States, 

i9°5 2I 3 

Chief Items in Accounts of the National Banks, 

1 863-1 905 At end of volume 



INDUSTRIAL AMERICA 



AMERICAN COMPETITION WITH EUROPE 

THE ships that carried Balboa and other early 
adventurers to America sought an El Do- 
rado and cargoes of gold and silver. The ships 
which come to America from Europe to-day carry 
many who are seeking their fortunes in the New 
World; but they take back much more of golden 
grain than of the precious metals. In the soil of 
American farms, in the mines of American coal, 
iron, zinc, copper, and lead, in the deposits of 
American petroleum and nickel, in the areas of 
American forests, in the efficiency of American 
labor, and in the genius of American industrial 
managers is to be found the real El Dorado. 
Resources far beyond the old traders' dreams of 
avarice, the adaptability and cleverness of our 
labor, and the inventiveness and highly developed 
managerial power of our captains of industry, are 



INDUSTRIAL AMERICA 

the causes which have enabled the United States 
successfully to enter the markets of the Old World 
in these recent years. Gold and silver, although 
produced in excess of our monetary needs and sent 
in rich streams to the banking reserves of Europe, 
are not the largest items in our foreign trade. The 
precious metals come and go only as the conse- 
quence of an enormously greater movement of 
merchandise. With our products we are buying 
European goods; and since there can be no buying 
without selling, our exports must be forthcoming 
if we wish to pay for our imports from Europe. 
It is therefore a matter of direct self-interest 
to Europeans that we should be able to send our 
exports to their markets and thus have the pur- 
chasing power to support our demand for their 
commodities. 

There is no sentiment in international trade: 
goods are bought voluntarily and only because they 
are wanted, and — barring trade restrictions — only 
in the cheapest markets. The pointed questions 
to be asked, therefore, are: (i) Why are American 
goods wanted abroad, and (2) Why can they be sold 
cheaper than the goods of others? 



AMERICAN COMPETITION WITH EUROPE 



These questions may be asked first in regard to 
the general class of extraction and agricultural 
products; and later, they will be asked in regard 
to manufactures. 

One large class of goods — such as bread-stuffs, 
petroleum, and the like — are wanted because the 
European supply is less than the European de- 
mand. Kind for kind, our grain is probably no 
better than that of Argentina or of Russia. It is 
shipped over-seas, because we produce more than 
we consume, and because other nations produce 
less than they consume. But, even in such cases, 
whether we export these commodities or not — 
commodities which are not only grown by rival 
shipping countries, but by the very countries to 
which we send them — depends upon our capacity 
to produce them at a cost so low as to insure us an 
entrance into the market. The causes of our suc- 
cessful competition in such commodities are so 
evident and so generally accepted that we need not 
tarry long on this part of our subject. Our area 
embraces a great variety of climates and soils 
peculiarly suited to growing cotton, wheat, corn, 
oats, barley, cattle, hogs, and the like. These 

3 



INDUSTRIAL AMERICA 

national resources, combined in a remarkable de- 
gree with the use of improved labor-saving machin- 
ery, and with cheap and rapid transportation by 
land and sea, have made us the chief purveyors of 
food to Great Britain and the Continent. High 
prices of labor in our wheat-fields, for instance, are 
not inconsistent with a low price of wheat per 
bushel, because the outlay is accompanied by the 
yield of a large number of bushels to the acre. No 
legislation, no artificial restrictions, can change the 
peculiar adaptability of large regions in our country 
for cotton, wheat, and similar products. The low 
comparative costs of these exports make them the 
inevitable means for purchasing imports which we 
can produce to less advantage. 

In order to give a concrete illustration of the 
influence of the tremendous "industrial revolu- 
tion " which has been going on in the last forty 
years, and which has affected agriculture as well as 
manufactures, a brief table is subjoined which in- 
dicates the gain resulting from the use of machinery 
in agricultural processes: 



AMERICAN COMPETITION WITH EUROPE 



Article. 



Small grains, planting 

Small grains, reaping and threshing 

Corn, planting 

Corn, cutting 

Corn, shelling 

Cotton, planting 

Cotton, cultivating 

Hay, cutting (Scythes vs. Mowers) . . 

Hay, harvesting and baling 

Potatoes, planting 

Tomatoes, planting 

Tomatoes, cultivating and harvest- 
ing 



Time now re- 
quired with 
machinery, 
per unit. 



Hours. Min. 

-3 2 -7 
1:00 

■37-5 
3- 45 

■36 

1:30 

12:51 

1:06 

n:34 
1:25 
1:40 

134:52 



Time required 
by hand pro- 
cess, per unit. 



Hours. Min. 

10:55 
46:40 

6:i5 

5:00 
66:40 

8:48 
60:00 

7:20 

35:30 
15:00 
10:00 

324:20 



The general conclusion of an extended investi- 
gation * is that one man, with the improved machin- 
ery in use to-day, can cultivate and harvest nearly 
twice as large a crop as he could have done under 
the older hand processes. 

Nor should foreign producers of wheat build any 
hopes upon the early exhaustion of our soil and the 
consequent increase in the cost of growing this 
grain. It is true most of the wheat land has been 
already taken up, but the introduction of new and 
improved machinery, saving the use of labor, will 
counteract, for some time to come, any increased 

1 Report of the U. S. Commissioner of Labor, 1898, vol. i. 

5 



INDUSTRIAL AMERICA 

cost arising from using less desirable lands. More- 
over, railway competition is working to place the 
grain cheaply in the market from regions hitherto 
not reached by transportation. So far, wheat 
culture has been confined to lands having the usual 
rainfall. Now, however, by the Campbell meth- 
ods, large crops of corn and the like are being 
successfully raised even on lands of limited rainfall, 
which have been regarded hitherto as unproductive 
except by artificial irrigation. The limited rainfall 
of winter and early spring in the dry regions is kept 
stored in the soil by packing the surface, and by 
pulverizing the top of the ground. 

The production of meat and cattle is likely to 
increase rather than to diminish. At present, prices 
of cattle are very low; but in the past, expenses of 
production have had little relation to the price of 
cattle. The era of the free range for cattle is fast 
passing; and they are now being systematically 
bred and fattened on fenced ranges. On the free 
range expenses were low, but prices were often high. 
Consequently, profits were not infrequently enor- 
mous. As yet, on the inclosed ranges, the expense 
of buying, of leasing land, of providing wells and 
windmills, of improving the breeds of cattle, has 
not been tried long enough to enable us to say 

6 



AMERICAN COMPETITION WITH EUROPE 

whether the prices of cattle will be increased so as 
to affect the situation materially. I doubt it. The 
fencing saves labor, improves the grass, and in 
general reduces the cost, while increasing the yield 
of calves. The quantity of land available for cattle 
only, in price, soil, and situation, is, of course, now 
very large, but in time it must become more or less 
limited. That time is, however, distant. 

As regards sheep and mutton, the plains are no 
longer likely to give unlimited pasturage, because of 
the rapid extension over new areas of systematic 
farming. Consequently, it is inevitable that sheep 
will be confined to mountain-pastures unsuited to 
general cultivation. As to hogs and pork, their 
growth and breeding is extending with the spread 
of the cultivable area, particularly of Indian corn, 
Kaffir corn, Milo maize, cowpeas, and alfalfa. 
With better breeds and changing feed, more and 
heavier animals are coming to market. 

n 

When we turn to manufactured articles long pro- 
duced by European makers, how is it that America 
can successfully export these goods to Europe and 
sell them in competition with the best workers of 
the Old World ? Here we touch the pivotal point in 

7 



INDUSTRIAL AMERICA 

this discussion. In regard to such goods it is ad- 
mitted that Europe could provide the whole of the 
needed supply. Granting this fact, why is it that 
the United States can pay freight on these goods 
across the Atlantic and still undersell her rivals? 
Obviously, no one supposes that we do this with any 
and all kinds of goods; for our trade is but an appli- 
cation of the doctrine of comparative cost between 
goods in the exporting country. Yet we are able 
to undersell other countries in a long list of goods, 
and as time goes on, this list is steadily increasing. 
Among American exports of manufactures there 
are no less than twenty-five different groups of 
articles, and more than 125 separate kinds of manu- 
factures. Of these, the amount of whose exports 
exceeded $5,000,000 in 1904, the following may be 
enumerated : 

Iron and steel $111,900,000 

Wood, and manufactures of 65,400,000 

Copper, and manufactures of 57,100,000 

Leather, and manufactures of 33,900,000 

Agricultural implements 22,700,000 

Cotton, and manufactures of 22,400,000 

Chemicals, drugs, etc 14,800,000 

Carriages, cycles, cars, etc 10,900,000 

Paraffin 8,800,000 

Instruments, apparatus, etc 8, 100,000 

Paper 7,500,000 

Cordage, etc 6,400,000 

8 



AMERICAN COMPETITION WITH EUROPE 

In spite of our advantages in bread-stuffs, ex- 
tractive products, and the like, out of a total of 
$1,435,100,000 of domestic exports, not less than 
twenty-five per cent are contributed directly by 
our larger manufacturing industries. 

As to manufactured articles like these, on many 
of which much labor is expended, what are the 
basic causes making such results possible? Al- 
though so many different classes of manufactured 
exports compel attention, the facts are not so easy 
of analysis as in the case of agricultural articles. 
But we will now address ourselves to a study of 
these commodities in order that we may get an 
answer to our main inquiry. Why can we success- 
fully sell goods like these in European markets? 

To get at once to the essential advantages of 
American productivity, our examination will cover 
the following constituents of expenses of produc- 
tion: 

a. Education- 

b. Taxation. 

c. Transportation. 

d. Material Resources. 

e. Improved Processes. 
/. Labor. 

g. Management. 

9 



INDUSTRIAL AMERICA 

a. In discussing the effects of education on 
American competition, obviously we shall touch 
upon only those elements which bear upon the 
cost and quality of our exports. The free public 
schools in every part of the country supply the de- 
mand for a general training in the common-school 
subjects; in towns and cities the high schools pro- 
vide the science, mathematics, language, English 
literature, and history which make up the second- 
ary education — or work for entrance to colleges and 
universities. The bachelor's degree of our best 
institutions is generally won by four years' work 
after leaving the high school or academy. This 
course extends to possibly one year beyond that of 
the German gymnasium. The graduate, after 
receiving the bachelor's degree, is occupied about 
three years in studying for the degree of doctor of 
philosophy. This degree is more difficult to get 
from our leading institutions than from many 
German universities. Graduates not entering 
teaching go to professional schools of law, medi- 
cine, and technology; but many may go to these 
schools direct from the high school, since only the 
few best institutions require a bachelor's degree 
for entrance to their professional schools. 

The great body of American laborers have only 
10 



AMERICAN COMPETITION WITH EUROPE 

a common-school education; for, except in rare 
cases, technical schools for them are not provided 
by the State. The sons of artisans, laborers, and 
the like may enter some of the many private busi- 
ness schools (called "colleges"). In fact, the 
majority of persons entering a business career from 
families of small means, get lessons in book-keep- 
ing, typewriting, stenography, and business forms, 
either in the routine of the office or by extra hours 
in the private commercial schools. The training 
of men in the routine and details of foreign com- 
merce, as in Germany, is absent in the United 
States. Lately, however, colleges of commerce 
have been created in several universities for teach- 
ing the advanced courses in commercial, economic, 
and administrative subjects; but these institutions 
are rather professional than technical. 

The best engineering, mechanical, and technical 
institutions are chiefly independent of the State. 
They have been founded by gifts of private per- 
sons, sometimes aided by grants from a State treas- 
ury. These schools at Harvard, Yale, Columbia, 
Cornell and Perdue universities, the Institute of 
Technology in Boston, and the Stevens Institute 
in Hoboken, N. J., are all admirably conducted. 
Their graduates are the efficient managers of ma- 
il 



INDUSTRIAL AMERICA 

chine-shops, mines, railways, and canals. In short, 
the man who coordinates labor, capital, and re- 
sources in American industry, receives a splendid 
professional preparation for practical success. 
When this fact is taken in connection with the 
other fact, that the best brains of the country enter 
into trade and industry, we may come to understand 
why America seems to be almost preeminent in its 
class of bold, daring, energetic, far-seeing, forceful 
managers. 

Of a different kind — but not to be neglected in 
its powerful influence on foreign trade — is the suc- 
cessful training given in the agricultural schools in 
various States. Their bulletins, taken together 
with the remarkably effective work of the United 
States Department of Agriculture, have had a 
marked result in spreading the knowledge of scien- 
tific methods of farming, and in introducing new 
and efficient processes of agriculture. 

b. Taxation, in general, is badly laid in the 
United States. National taxation is imposed 
chiefly through customs duties upon imports. As 
a consequence, it is widely diffused, and because of 
its indirect incidence it is little felt. Tariff rates on 
clothing, lumber, and many articles of the laborer's 

12 



AMERICAN COMPETITION WITH EUROPE 

consumption maintain high prices ; and yet there is 
little resistance because the incidence is not under- 
stood, and because the chains of protection have 
become matters of habit. The growth of the 
national budget has gone beyond all reason; but 
its expenditure is maintained — and will be main- 
tained — at a high point as a justification for high 
tariff duties in times of peace. The withdrawal of 
labor for military service is absent, yet the tax for 
the maintenance of the army pensions and for new 
ships is large and beyond reason; but as these sums 
are provided for out of the national income, their 
burden is so diffused over a great wealth as to be 
almost imperceptible. The internal revenue du- 
ties on such objects as tobacco and spirituous 
liquors are not extended, nor encouraged, so long 
as producers demand high duties on imports. In 
fact, the duties are too high to produce the most 
revenue. When our tariff system is properly re- 
vised by providing free raw materials, a marked 
reduction of duties would then be possible on many 
articles, such as woollens, iron, and steel, and the 
like, and while still furnishing all the needed pro- 
tection to our manufacturers, the real wages of our 
laborers would be increased by the fall of prices, 
their standard of living raised, and their possibili- 

13 



INDUSTRIAL AMERICA 

ties of efficiency given wider play. Industries such 
as farming, from which bread-stuffs go to Europe, 
are practically unaffected by the tariff system, and 
are, in comparison with other industries, highly 
taxed. 

State taxation is not heavy. It varies greatly 
between all the forty-five States, especially in deal- 
ing with corporations. As a rule, the property tax 
is used in a highly objectionable manner. 

Municipal taxation of personal and real prop- 
erty is the pivotal matter. In cities corruptly ruled 
by political organizations the rate of taxation is 
high; but usually it is made to fall — although often 
unequally — on those who have property. It is the 
producer, and not the laborer, in the main, who 
pays the scot. 

State and municipal taxation, when heavy, drives 
factories to places better disposed to such industries, 
and thus excessive burdens are escaped. The 
managerial function can be relied on to prevent high 
taxes: the managers watch their State legislatures 
and city councils with eagle eyes. It is only in 
national legislation, under a high tariff system, that 
serious difficulties are to be feared. Until the 
present time, the manufacturer has successfully 
sheltered himself behind a system through which 

14 



AMERICAN COMPETITION WITH EUROPE 

almost all taxation falls upon products and thus 
passes on to the consumer. Industrially speaking, 
in connection with the elements of cost, national 
taxation falls more or less upon the expenditure of 
the laborer. A reduction of the import duties, 
therefore, would probably lower our labor cost, and 
thus help us in our competition with foreign coun- 
tries. 

c. In addition to these elements of cost already 
discussed, it must be remembered that transporta- 
tion of products to the place of consumption is an 
essential part of the expenses of production, and it 
also enters into the selling price of the articles in 
question. Low railway and steam-ship rates, there- 
fore, are a necessity if foreign competition is to be 
effective. In this respect, the heavy rails, the 
powerful locomotives, the long trains, the improved 
grades, the larger cars for coal and other products, 
have, in a remarkable way, reduced the charge for 
carrying a ton one mile. In 1880 it was about 
two cents; in 1904 it was 0.78. 

As regards grain, cattle, and western products, 
the Mississippi and the Gulf of Mexico must be 
reckoned with. The Mississippi provides a road- 
bed without cost for one powerful engine towing an 
incredible number of barges laden with wheat at 

i5 



INDUSTRIAL AMERICA 

St. Louis for New Orleans ; and the grain west of 
the same river can now be more cheaply sent by 
rail to ports on the Gulf of Mexico than to the 
Atlantic seaboard. Thence, in ocean transporta- 
tion the United States fortunately possesses the free 
competition of the world's shipping. With unex- 
celled railway service, at rates which have made the 
Western wheat-fields preeminent over all those of 
the Eastern States, and even of Great Britain and 
Europe, the advantages of transportation are 
certainly working in favor of the United States in 
any contest with older countries. 

d. The next, and possibly the chief, element in 
low expenses of production in America is to be 
found in the rich gifts of Nature. It would be diffi- 
cult to exaggerate on this point; but a few typical il- 
lustrations must suffice. It is literally true that one 
company within its own property in Alabama can 
look from a mountain of iron ore across a valley of 
limestone to a mountain of coal; and the envelope 
of earth lying over the deposits is extremely thin. 
Again, the ability of Americans to undersell iron- 
masters in Europe is largely due to the marvellous 
richness of the Bessemer ore deposits on Lake 
Superior. In many places mining is unnecessary, 

16 



AMERICAN COMPETITION WITH EUROPE 

and the ore is scooped from the surface directly into 
the railway-cars. The possession of cheap water 
transportation to the places where materials are 
assembled is another gift of Nature, although in 
this, as in the processes of manufacture, invention 
and management have their full share in the result. 
Another example may be found in the astonishing 
deposits of copper. The Calumet and Hecla mine 
on Lake Superior was capitalized at only $2,500,- 
000, of which only one-half was paid in; it has 
already paid in dividends to share-holders over 
$70,000,000, while its shafts and machinery are 
superb illustrations of modern engineering skill. 
Moreover, the copper mines of Montana, and of the 
Rocky Mountains farther south, in Arizona, are 
scarcely less marvellous. In the deposits of coal, 
also, many of our States are extremely rich. The 
anthracite coal-mines of Pennsylvania, however, 
may not last for many years; but the bituminous 
and coking coals of other regions exist in quanti- 
ties far beyond the present demand. These de- 
posits are found from Virginia to Colorado, and 
insure cheap fuel to manufacturers for practically 
an unlimited future. In regard to raw cotton the 
story is much the same. The new supply from 
Egypt, made possible by the Assuan Dam, may 

17 



INDUSTRIAL AMERICA 

compete with American cotton, but its amount is 
limited, while the world's demand is being rapidly 
extended. The old cotton area of the so-called 
South has been added to, moreover, by the cotton- 
fields of Texas, Oklahoma, Indian Territory, and 
Arkansas. Once our timber resources were a 
cause of wealth and pride. They gave us suprem- 
acy in building wooden ships for our clever sailors 
in the days before steam and iron ships. But we 
have been penny-wise and pound-foolish in care- 
lessly and lavishly wasting our forests. Not until 
we adopt the forestry policy of Europe can we hope 
to regain our advantages in cheap lumber. 

Obviously, our chances for competition with 
Europe — so far as they depend upon cheap raw 
materials — are immensely aided by the exceptional 
gifts of Nature as thus enumerated, but it is equally 
clear that exceptional gifts are not universal. In 
many industries our raw materials are not obtained 
cheaply. For instance, we cannot produce certain 
grades of wool as cheaply as Australia or Argen- 
tina; in fact, the quality of the fibre is fixed by our 
climate, and there are some kinds which we can- 
not possibly produce. Therefore, so far as foreign 
competition is concerned, we are estopped by high 
cost of materials in some industries. The curiosi- 

18 



AMERICAN COMPETITION WITH EUROPE 

ties of tariff legislation have resulted in attempts to 
protect American producers of materials where we 
have been at a disadvantage relatively to other 
countries; and, besides increasing the price of fin- 
ished goods to the home consumer, this protection 
has effectually protected the foreigner in his home 
market by making our manufacturer who uses 
high-priced materials unable to compete abroad. 
Thus our tariff has been a help to the foreign man- 
ufacturer. When the spread of liberal views upon 
the tariff goes farther — as it is now going — Euro- 
pean countries may very properly have reason to 
fear our competition in industries in which they are 
now safely protected. 

e. Invention and improved processes are not 
peculiar to the United States. The Thomas- Gil- 
christ converter, the Siemens furnace, and many 
other brilliant inventions of a practical sort, made 
by foreigners, suggest themselves at once. And 
yet the diffusion of inventiveness among Americans 
is a manifestation so marked, and it has had so 
distinct an influence upon our ability to compete 
with other nations, that its existence and its results 
must be given a proper emphasis in the analysis of 
the causes underlying our successful foreign com- 

19 



INDUSTRIAL AMERICA 

petition. It appears everywhere, in every industry. 
The railway-train of to-day, from truck to roof, is 
absolutely a different thing from that of twenty 
years ago. The Mackay sewing-machine, which 
made a stitch with both the upward as well as the 
downward movement of the needle, doubled the 
output of our shoe factories and revolutionized the 
price of shoes. A simple change, suggested by a 
workman, by which the spindle in a cotton-mill was 
given more play at each end, increased the revolu- 
tions of the spindle from 4,000 to 10,000 per minute, 
and enormously increased the output of the mill. 
The mower, the corn-binder, the harvester, and 
other machines used by all American farmers are 
marvellous combinations of devices for saving labor 
and doing work efficiently. The great success of the 
Carnegie Steel Works is largely due to the inven- 
tions of William Jones. In rolling rails, his auto- 
matic table, run by compressed air, enormously aug- 
mented the productivity of steel mills. In the 
Bethlehem Steel Works, the veteran John Fritz 
introduced the three-high roller, which allowed the 
rail to be rolled by a new set of rollers, both when 
coming back as well as when going forward. The 
result is that the tonnage of output in a steel mill 
has been increased from about 300 tons to possibly 

20 



AMERICAN COMPETITION WITH EUROPE 

3,000 tons of steel rails per twenty-four hours. 
And so the story might be extended to an infinite 
number of instances. In the making of watches at 
Waltham and Elgin, the cleverness of the special 
machinery is something uncanny. In this and all 
industries the inventions and improvements are so 
many and so frequent as no longer to excite com- 
ment; but their influence on lowered cost, and on 
lowered price, when we enter into the markets of 
the world, is a powerful factor working in our favor 
in all industries — and not merely in those in which 
we have exceptionally cheap raw materials. Every 
utensil in common use in the household or kitchen 
has been changed, cheapened, and improved by 
invention. The Patent Office at Washington 
contains nearly everything from an incandescent 
card-cat to frighten rats, to a chicken-hopple cal- 
culated to walk a chicken out of the garden as soon 
as it attempts to scratch. 

/. Of primary interest, not only to the practical 
manufacturer, but to the audience which I have 
the honor to address, must be the efficiency taken 
in connection with the pay of American labor. 
The price of the goods sold in foreign markets is 
directly affected by the outlay for labor at home; 

21 



INDUSTRIAL AMERICA 

and in most of our governmental and political exam- 
inations of this topic we are given only the facts of 
simple money wages. It is needless to say that 
comparisons of money wages paid in different coun- 
tries are wholly inconclusive as to the ability to 
compete. As well say that a man's riches are 
measured by the number of acres of land he owns; 
everything depends upon the kind of land. The 
amount of money paid is of no importance, unless 
we know what the labor returns to the employer for 
his outlay. Considered from the point of view of 
the quantity of goods made ready for market, 
high-priced labor may be, and usually is, the cheap- 
est labor to the employer. The more a given kind 
of labor adds to the output — that is, the greater its 
productivity — the more the employer can reward it 
and yet sell each unit of the product at a lower 
price than before. 

In the United States, money wages for skilled 
labor in most manufacturing industries are abso- 
lutely high, but in comparison with English and 
continental labor it is, speaking generally, more 
efficient and more easily adapted to new processes. 
Accepting this fact — which is generally admitted 
—in spite of the hindrances of labor unions, what 
is the explanation of it? The ingenuity and wide- 

22 



AMERICAN COMPETITION WITH EUROPE 

spread tendency to inventiveness is one of the 
marked characteristics of American labor, particu- 
larly in mechanical, mining, and extraction indus- 
tries. Nothing is stereotyped, and new ways of 
doing familiar things are constantly appearing. 
The inventiveness of the American laborer has 
given a proverbial meaning to the name "Yankee." 
On the prairie, wire fence is stretched by using the 
wheel on a wagon as a lever; and a theodolite is 
made by a carpenter's level laid on a board with 
movable legs. And so it goes. 

Again, the influence of institutions stimulates 
inventiveness and efficiency. The passion for 
equality has many disagreeable manifestations, but 
it spurs men on to effort, sacrifice, and intelligent 
struggle for a rise in life. The fact that any one 
can obtain the industrial results of his own ability, 
that wealth comes easily, that a competence gives 
social recognition, that political office is within 
any one's reach, are tremendous incentives to am- 
bition and industry. In fact, the certainty that 
wealth will win social recognition for wife and 
children — if not in this, then in the next generation 
— is the most powerful incentive to the worker in the 
industrial field. The influence of the hope of social 
advancement in America cannot easily be under- 

2 3 



INDUSTRIAL AMERICA 

estimated. There are, moreover, no barriers set 
by custom between different occupations. The 
great merchant or the successful statesman of to- 
day was very often the farmer-boy of yesterday. 
The railway brakeman or telegrapher of to-day is 
as often as not the railway magnate of to-morrow. 
Every prize is open to character and ability. 

To this is to be added the diffusion of elementary 
education. It is rare to find a common American 
laborer who cannot read and write. The public- 
school system of the United States is far from per- 
fection in many ways : it creates smartness, quick- 
ness, keenness, rather than precision, depth, and 
self-control ; but its influence in stirring intelligence 
is unmistakable. As has been shown, technical 
training for the working classes in America is not- 
ably absent, while high technical institutions in 
which the employing classes are admirably trained 
are conspicuous for their efficiency. The result is 
that the ordinary laborer is acute, and his technical 
skill is obtained only in the shop in which he works. 

Perhaps more important than anything else in its 
stimulating effect on raising the efficiency of Amer- 
ican labor is the high standard of living. Nothing 
is so influential in quickening enterprise and activ- 
ity in sluggish human nature as the example of 

24 






AMERICAN COMPETITION WITH EUROPE 

others. When the immigrant comes to our shores 
from a life of low subsistence, he is at once struck by 
the comfort, dress, and high expenditure of the work- 
ing class. Imitation follows a new ambition, and 
it is not long before he is on the same high standard 
as the rest. He becomes strenuous because he 
sees a reward which directly appeals to him. 

And underneath it all is an unmistakable ideal- 
ism and optimism, which is more wide-spread in 
America than is generally supposed. Possunt, 
quia posse videntur. Belief in success is universal 
and it is contagious. In the form of boastfulness 
and truculence it has given an unpleasant touch to 
American character, but that is only its coarser 
manifestation. Still, American idealism is the 
main source of American industrial progress; it 
drives each parent to give the child advantages un- 
known to the former; it leads to wonderful and often 
most pathetic sacrifices for the sake of education; 
it lies behind the endowment and creation of end- 
less private schools, colleges, and universities; it 
condones rawness now because it sees finish and 
form in the future; it fills the atmosphere, and even 
those who do not understand it are infected and 
moved by it. 

In this brief summary, I have mentioned some 

25 



INDUSTRIAL AMERICA 

of the powerful leavening influences acting upon 
the efficiency of American labor as a whole. It 
goes without saying, of course, that not all labor is 
efficient, and that we have serious difficulties with 
labor organizations (of which I shall speak in 
another lecture) ; but the truth is certainly to be 
seen in the general characteristics which I have 
mentioned. 

g. Given efficient labor and rich natural re- 
sources, the management of both becomes possibly 
more important than any other element in produc- 
tion. A well-built and well-equipped ship under 
an incompetent captain may be outstripped in an 
ocean race by an inferior ship commanded by a 
skilful sailor. And so it is with the industrial or- 
ganization and the captain of industry. Leader- 
ship is the pivotal need in war, in diplomacy, and 
in industry. Genius in management is, of course, 
not confined within the geographical boundaries of 
any one country; but there is reason to believe that 
in the United States conditions have arisen which 
have brought forth in great numbers men of 
remarkable business capacity. In transportation 
these men are unequalled in the world — they are 
sui generis. 

26 



AMERICAN COMPETITION WITH EUROPE 

The conditions out of which great managers are 
born are not far to seek. As all economists know, 
the man has come with the need; with the growth 
of the modern corporation, and the separation of the 
manager from the capitalist share-holder, the de- 
mand for great skill in directing men, in foreseeing 
the business future, in knowledge of markets and 
prices, in intimate insight into the money market 
and its machinery, and in sound judgment and 
understanding of human nature, has developed 
beyond all expectation. The men of experience, 
wisdom, technical skill, and breadth of vision are 
rare. The brainy man, judicial, calm, well-poised, 
able to take unlimited responsibility without losing 
his nerve, is eagerly sought for by those who have 
large undertakings. And America is a place of 
large industrial operations. Much amusement is 
sometimes afforded our friends abroad when a 
boastful American begins to fire off his panegyrics 
on the industrial triumphs of his native land : they 
are often coarse and conceited. And yet the extent, 
the prodigious resources, and the monumental 
character of many enterprises are facts which can- 
not be blinked. The railway systems, the mining 
schemes, the ore deposits, and many financial oper- 
ations are so vast, and demand such a number of 

27 



INDUSTRIAL AMERICA 

hundreds of millions of dollars in their management 
and dealings, that "the man who bores with a big 
auger" is an absolute necessity. In short, the ex- 
ceptional industrial manager is as much the evolu- 
tion of exceptional economic conditions as is the 
man of the hour in the walks of literature or states- 
craft. 

The demands of the hour, also, have led to the 
rise of highly efficient and remarkable technical 
schools — to which I referred before — of a sort at- 
tended by many of the most ambitious and capable 
men of the United States. These institutions have 
gained in numbers, in breadth of curriculum, in 
skilled teachers, in influence, with the business 
world to a wonderful extent. Their graduates are 
always eagerly sought for, and they begin to earn 
large salaries at once on entering active life. The 
richness of endowments, the extent of their equip- 
ment, the salaries paid instructors, are due to the 
appreciation of these schools by benefactors who 
have themselves accumulated great wealth in in- 
dustry. As is well known, great private gifts to 
such institutions are the fashion in the United 
States, and Government aid is seldom given outside 
of the agricultural schools established under the 
Morrill act. There is, therefore, nothing rigid or 

28 



AMERICAN COMPETITION WITH EUROPE 

stereotyped in the methods, or in the teaching; on 
the contrary, there is rivalry in efficiency and in 
ways of winning distinction. Very recently, more- 
over, there is an unmistakable tendency toward a 
broader liberal education as a basis for a technical 
industrial career. Whatever may be lacking in 
industrial training for our workmen, nothing is 
lacking in the means of preparing well for great 
enterprises the man who aspires to lead the indus- 
trial army. To be sure, as with the poet, so with 
the manager: nascitur non fit; and this education 
could not of itself create the successful men of 
action. 

There are, it should be emphasized, special rea- 
sons why the best brains of this country enter upon 
a business career. A fine special education given 
to the ablest men in the land, working upon excep- 
tional resources with highly efficient labor, is a 
combination not easy to overcome in a com- 
petitive market. There are able and wonderful 
men in industry in other lands: the Krupps, the 
Armstrongs, and the Siemenses; but in the United 
States, it should never be forgotten, the great prizes 
of industry and commerce appeal successfully to 
the best intellects of the country, unhindered by any 
social restrictions. There is no condescension 

29 



INDUSTRIAL AMERICA 

toward men in trade or manufacture. They not 
only stand on the same social level with the success- 
ful scholar, lawyer, doctor, and politician, but they 
even assume a superiority, based on material 
success, to the man of the university. Quite apart 
from the ethics of these relations, we must not 
overlook the simple fact. The greatest material 
inducements are in industry, and the strongest, 
most acute, and most powerful intellects of the 
country are to-day in the service of production. 
The ablest men in America are not in the army, or 
navy, or in the public service — but in industry. 
In most countries of Europe until lately this is ex- 
actly the reverse. Social ordinances there have kept 
the ablest men out of industry and trade. Therefore, 
if European countries find our goods so cheapened 
and so well made, that they successfully compete 
with others in every foreign market to which they 
are admitted on even terms, they must take heed 
as to their internal social restrictions. They may 
care more for their traditions as to what is clean and 
what is unclean than for commercial success; but 
they must be willing to pay the price cheerfully. 

The ability and training of our industrial mana- 
gers, moreover, is accompanied by that striking 
inventive capacity which pervades all ranks of the 

3° 



AMERICAN COMPETITION WITH EUROPE 

American people. It is this quality which gives to 
our workshops such characteristic flexibility, adapt- 
ability, and ease in introducing new machinery 
and new processes. By the time competitors in 
other countries have learned of and adopted the 
new methods, they are often obsolete in American 
shops, because newer ideas have supplanted the 
old. This has been true in the past; although in 
some industries, such as iron and steel, foreign 
makers are, in regard to methods, more nearly 
abreast of us now than for many years. 

In conclusion, the combination of exceptional 
elements for cheap production in many industries — 
although not in all — has resulted in the remarkable 
rise of American exports from $835,638,658 in 1880, 
to $1,460,827,271 in 1904. This is the practical 
outcome of the discovery of America and its settle- 
ment by civilized Europeans. The old Spanish 
galleons have given way to enormous steel steam- 
ships, and the real stream of wealth goes to Europe 
in commodities rather than in the standard of value. 
The day of the mercantilist is past, and a country 
no longer regards herself richest to which the 
largest stream of the precious metals is flowing. 
Useful commodities mean more than the medium by 

3i 



INDUSTRIAL AMERICA 

which they are exchanged, and America, instead of 
being plundered by adventurers for gold and silver, 
is now united with the great commercial states of 
Europe by the ties of peace and trade due to our 
providing their essential wants on the one side, and 
to a desire on our side for the products of finish 
and quality which issue from the workshops of the 
Old World. These are the triumphs of peace and 
industry. May they long continue! 



32 



II 



PROTECTIONISM AND RECIPROCITY IN THE 
UNITED STATES 



IN the Rocky Mountains a wild-cat is said to 
have leaped from a tree upon a hunter, who 
happened to catch the animal so that it could not 
bite, but also so that he did not dare to loose his 
hold. Thus the beast was carried for miles until, 
with assistance, it was finally killed. In much the 
same way the United States finds itself in the 
clutches of protectionism ; it cannot easily rid itself 
of the system, it is a heavy obstacle to foreign trade, 
and it needs outside help to destroy the incubus. 
Our resources and our strength are sufficient to bear 
the burden of this system for the time, but it is openly 
admitted that it is now holding us back from active- 
ly expanding our trade with foreign countries. 
Possibly we may hope to find some neighbors who, 
in friendly reciprocity, may help us to lighten the 
burden we are carrying. 

It will be remembered that this burden has not 
33 



INDUSTRIAL AMERICA 

always been so heavy. After the panic of 1837-39, 
a regime of very low duties, under the acts of 1846 
and 1857, was accompanied by very great pros- 
perity in the fifteen years before the Civil War. 
Political considerations enabled the small protec- 
tionist party, before Lincoln's election, to pass the 
Morrill act of 186 1, by which increased duties were 
placed on iron and wool, specific substituted for ad 
valorem duties, and rates in general fixed somewhat 
above those of 1846. This measure was a bid for 
the Republican vote of Pennsylvania and of some 
western wool-growing States; but, as yet, manu- 
facturers in general were not seeking protection. 
The system had not yet taken the country in its 
grasp. 

As the war progressed, an unintelligent fiscal 
policy — due to inexperience with affairs of such 
magnitude — led to great confusion and a "veri- 
table furor" of taxation. Out of this situation 
came the war- tariff of 1864, which remains prac- 
tically the backbone of the system as it exists 
to-day. This act of June 30, 1864, enormously 
extended the internal revenue taxes, 1 on the 
principle of the Irishman at Donnybrook Fair: 

1 See Taussig, " The Tariff History of the United States." For 
this quotation from David A. Wells, see p. 164 of Taussig. 

34 



PROTECTIONISM AND RECIPROCITY 

" Whenever you see a head, hit it; whenever you 
see a commodity, tax it." There was no real study 
of the incidence of taxes. Everything, including 
incomes, was heavily taxed. And let me remark 
here that internal revenue duties have ever since 
this time borne an important relation to the protec- 
tionist policy. At this time they were assigned as 
the justification for a prodigious increase in import 
duties, in order to give domestic producers a pro- 
tection equal to the rise in internal taxes. The act 
did more than this. Under cover of the needs of 
war revenue for the State, selfish private interests 
introduced schemes for special favors — in fact, 
they sprang upon the country, in its weakened 
condition, and have never since relaxed their grasp. 
The best historian 1 of the period describes how 
this policy "resulted in a most unexpected and 
extravagant application of protection, and, more- 
over, made possible a subservience of the public 
needs to the private gains of individuals such as 
unfortunately made its appearance in many other 
branches of the war administration. Every domes- 
tic producer who came before Congress got what he 
wanted in the way of duties. Protection ran riot; 
and this, moreover, not merely for the time being. 
1 Taussig, ibid., pp. 166-67. 

35 



INDUSTRIAL AMERICA 

The whole tone of the public mind toward the 
question of import duties became distorted. Not 
only during the war, but for several years after it, 
all feeling of opposition to high import duties almost 
entirely disappeared. The habit of putting on as 
high rates as any one asked had become so strong 
that it could hardly be shaken off; and even after 
the war, almost any increase of duties demanded by 
domestic producers was readily made. The war 
had in many ways a bracing and ennobling influ- 
ence on our national life; but its immediate effect 
on business affairs, and on all legislation affecting 
moneyed interests, was demoralizing. The line be- 
tween public duty and private interests was often 
lost sight of by legislators. Great fortunes were 
made by changes in legislation, urged and brought 
about by those who were benefited by them; and 
the country has seen with sorrow that the honor 
and honesty of public men did not remain unde- 
filed. The tariff, like other legislation on matters of 
finance, was affected by these causes. Schemes for 
money-making were incorporated in it, and were 
hardly questioned by Congress. When more en- 
lightened and unselfish views began to make their 
way, and protests were made against the abuses 
and excessive duties of the war period, these had 

36 



PROTECTIONISM AND RECIPROCITY 

obtained, as we shall see, too strong a hold to be 
easily shaken off." 

This high level of duties (averaging 47.06 per 
cent), crude and full of abuses, remained in force 
without reduction for twenty years. After the close 
of the war, when relief from oppressive taxes be- 
came imperative, successive acts for reducing and 
removing the internal taxes were passed. By 1872 
all those which had been the reason for the high 
compensating import duties had disappeared. 
Then was disclosed the strategy of the protection- 
ists, which has been resorted to in similar ways 
from that day to this. With the removal of internal 
taxes, there should have gone a reduction of such 
import duties as had been raised to offset the in- 
ternal taxes. This, however, was not done; and, 
generally speaking, it has never been done. A 
system introduced under cover of a national war 
emergency has been made permanent by a process 
of passive resistance to change. In short, the 
adoption and continuance of high protection was 
never reached after open discussion and a campaign 
of education among the voters. To avoid discus- 
sion of its purposes has been, and is now, a con- 
sistent policy. In the main, the advocates of pro- 
tection try to continue all rates once established. 

37 



INDUSTRIAL AMERICA 

The result of such a tendency, of course, has 
been the creation of a rigid and inflexible range 
of duties quite disassociated from the inevitable 
changes due to the progress of industry. 

n 

After the Civil War, the experience with heavy 
duties led to a reaction in favor of tariff revision. 
But under skilful guidance, the protected interests 
wisely bowed before the storm, and in 1870 con- 
sented to a reduction of import duties — but only on 
purely revenue articles such as tea, coffee, wines, 
sugar, molasses, and spices. Yet, under cover of 
this reduction, the protective duties on steel rails 
and some other goods were very cleverly raised. 
Again, in 1872, a strong wave of tariff reform was 
met by a horizontal reduction of ten per cent. 
While adroitly granting this concession, the pro- 
tectionists succeeded in abolishing entirely the 
revenue duties on tea and coffee, and in reducing 
the internal taxes on tobacco and whiskey. The 
principle has been to abolish all non-protective 
duties — such as those on cocoa, pepper, cinnamon, 
cloves, and olives — in order that protective duties 
should be retained. The protectionists were justly 
proud of this revision of the tariff "by its friends," 

38 



PROTECTIONISM AND RECIPROCITY 

under which fifty-three millions of dollars in duties 
were removed, and yet the protected industries 
were left practically untouched. 

After the panic of 1873 had reduced our imports 
and our revenue, and when the efforts of tariff re- 
formers had been much forgotten, the act of 1875 
quietly repealed the ten per cent reduction of 1872. 
Thus is explained the wisdom of the temporary 
concession in 1872: a general reduction or advance, 
which did not touch specific industries, did not 
attract much public attention. Thereby a tactical 
advantage has been gained. For, since then, bills 
proposing to lower duties have had little chance of 
success. Consequently, exorbitantly high war 
duties have been long maintained in times of peace, 
and expenditures have been easily stimulated to 
use up the income. The needs of the fiscal sys- 
tem, under proper revenue duties, have had no 
more consideration than the colors of the sunset. 

" The connection between tariff legislation and 
the state of the revenue has indeed been curiously 
constant in our history. . . . In 1861 the Morrill 
tariff was passed, partly in order to make good a 
deficit. During the war the need of money alone 
made possible the act of 1864. The ten per cent 
reduction of 1872 was called out largely by the 

39 



INDUSTRIAL AMERICA 

redundant revenue; its abolition in 1875 was 
excused by the falling off in the Government in- 
come. " 1 After 1880 the surplus ran about a 
hundred millions a year, and led to a demand for 
a reduction of the tariff. In 1882 a tariff com- 
mission was appointed, filled by protectionists, 
which reported in favor of a reduction of duties by 
twenty or twenty-five per cent. When the subse- 
quent act of 1883 was passed, it was found that, 
instead of a reduction, duties were raised on woollen 
dress-goods, woollen cloths and cassimeres, cotton 
hosiery, embroideries, trimmings, laces, insertings, 
etc.; iron ore, steel ingots, piston-rods, etc.; files, 
quicksilver, and many kinds of tools and machin- 
ery. Reductions, pro forma, were made on wool, 
some woollen goods, cheap cotton goods, pig-iron, 
steel rails, copper, and marble; but in no case was 
full protection removed, so that these changes 
brought no gain to the consumers in lowered prices. 
That is, after twenty years the high level of the war 
duties was practically reenacted. Every demand 
of this country for relief had been denied. 

The defeat of President Cleveland in 1887 was 
interpreted as a verdict against tariff reform and 
in favor of the Republican form of reciprocity. 

1 F. W. Taussig, ante cit., pp. 230-31. 
40 



PROTECTIONISM AND RECIPROCITY 

Consequently the McKinley act of 1890 was passed, 
imposing still higher protective duties and taxing 
articles hitherto untaxed. This same act intro- 
duced the question of reciprocity by putting certain 
articles — chiefly sugar, coffee, tea, and hides — on 
the free list, with a notice that if other countries 
would not admit some of our goods at privileged 
rates, these articles would be removed from the free 
list for those countries that refused. The essential 
idea of reciprocity, as viewed by the protectionists, 
is the admission free of only those articles which 
are not produced in the United States. On this 
ground reciprocity could be urged as not in con- 
flict with protective principles. Obviously, the 
offer of only non-competitive products is too 
limited to be anything more than a pretence. In 
the main it has been possible to admit only "tropi- 
cal products," and to exclude manufactures and 
the main articles of European imports. In actual 
operation, reciprocity has hinged on the admission 
of sugar free. Under the act of 1890, treaties were 
negotiated with Germany and Austria-Hungary. 
Germany granted us lower duties on wheat, corn, 
meat products (except pork and bacon), cheese, 
oleomargarine, flour, and certain live animals, and 
placed on the free list some agricultural products, 

4i 



INDUSTRIAL AMERICA 

hides, tan-bark, and wool. The provisions favored 
our agricultural interests. The great reason for 
this action of Germany, of course, lay in the 
desire to get her sugar into the United States 
free. The same was true of Austria-Hungary, 
which favored our manufactures in return for free 
sugar. 

The results of the reciprocity treaty with Ger- 
many were not important. Our exports to Ger- 
many for the year to June 30, 1891, before the 
treaty went into effect (February 1, 1892), were 
$92,795,456; in 1892 (including only five months 
under reciprocity), $105,521,558; in 1893, $83,578,- 
988; in 1894, $92,357,163. Thus no gain can be 
attributed to the treaty. On the other hand, our 
imports from Germany, before reciprocity, were 
$98,837,683; but in 1892, only $82,907,553. In 
1893 they rose, then fell off heavily in 1894. No 
increase in our imports, then, can be ascribed to 
the treaty. Undoubtedly, other conditions had 
more influence than it. 

In 1892 came a tremendous reaction against 
high protection — the causes of which will be ex- 
plained later — which reelected Mr. Cleveland 
president, and gave the Democrats control of both 
houses of Congress. The tariff-reform policy of 

42 



PROTECTIONISM AND RECIPROCITY 

the Democratic administration led to the passage 
of the Wilson act, August 24, 1894, based upon 
free raw materials, and a reduction of duties on 
articles of common use. The original Wilson bill 
proposed to put on the free list raw sugar, hides, 
tea, and coffee ; but the protectionist Senate (includ- 
ing some Democratic protectionists) — under the 
influence of the sugar trust, as every one believes — 
added a schedule of duties on both raw and refined 
sugar. If we keep in mind that it was sugar which 
served as the basis for the only reciprocity of im- 
portance under the McKinley act, it will be seen 
that the taxing of sugar by the Senate was the true 
cause of the destruction of that reciprocity. To be 
sure, the administration opposed the reciprocity of 
the McKinley act as being a retaliatory measure, 
and as really acting to increase the cost of goods to 
American consumers; but the Wilson bill specifi- 
cally provided for the retention of the reciprocity 
treaties then existing, and they would have been 
continued but for the tax on sugar. 

The outcome of this legislation is curious. The 
sugar duty raised a storm of protest in Germany, 
and retaliation by them could reach, of course, 
only those agricultural products other than sugar 
which entered most largely into our exports to Ger- 

43 



INDUSTRIAL AMERICA 

many. Therefore, the favors given the sugar trust 
by the United States were paid for by our farm- 
ers. And to the same source must be attributed 
the difficulties encountered at that time in Germany 
by our life-insurance companies. Throughout the 
whole experience with reciprocity, our manufact- 
urers have never been willing, under any circum- 
stances, to yield one jot to encourage reciprocity. 
Constantly higher duties have been obtained under 
every possible pretence, until foreign goods have in 
many cases been practically excluded from our 
markets. Obviously, when other countries lose 
their patience, and treat us as we treat them, by 
raising a barrier against our goods, this action falls 
grievously not on the offending manufacturers, but 
on the classes producing chiefly bread-stuffs or mak- 
ers of agricultural implements, which form the 
largest part of our exports to other countries. The 
problem of reciprocity, therefore, in the United 
States is simply a contest of selfishness on one 
side against the selfishness on the other side of a 
desire for markets in which to sell our surplus goods. 
In all cases, reciprocity — in any real sense — is a 
choice as to those to be sacrificed. There is, there- 
fore, little to be hoped from it. So far, reci- 
procity has been put forward by the protectionists 

44 



PROTECTIONISM AND RECIPROCITY 

as a device to occupy the attention of the public, 
and to side-track direct attempts for the revision of 
the tariff. By snapping the fingers of his left hand, 
the conjurer can draw away the attention of his 
audience from the tricks done by his right hand. 
If, as repeatedly asserted by party managers, 
reciprocity is intended to apply only to non-com- 
petitive goods, it can never be anything more 
than a farce. 

The nomination of Mr. Bryan on a free-silver 
platform in 1896 led to the election of Mr. McKin- 
ley. Although winning on the money issue, the 
Republicans immediately made an excuse of the 
need of more revenue, and in the Dingley act, 
July 24, 1897, wiped out the provisions of the Wil- 
son act, and raised import duties to the highest 
point ever known. This new legislation, which is 
now in force, taxed both hides and sugar; and a 
very saturnalia of protection ensued. A request 
for duties from any industry was practically sure of 
acceptance. As regards reciprocity, the provisions 
of the existing Dingley act now admit of three 
kinds of treaties : 

1. The old "tropical" reciprocity of theMcKin- 
ley act was allowed, but instead of free sugar and 
hides, tonka beans were substituted. 

45 



INDUSTRIAL AMERICA 

2. With European countries, lower rates were to 
be offered on wines, works of art, etc. 

3. A reduction of twenty per cent from the Ding- 
ley rates for a period of not more than five years 
was granted on any goods agreed upon. 

There was more promise than observance in 
these sections. The substitution of tonka beans 
for sugar and hides added to the gayety of nations, 
but not to their trade. The first two kinds of reci- 
procity could be negotiated and proclaimed by the 
President, because there was nothing of importance 
in them. But all treaties of the third kind entered 
into by the President must be ratified by the Senate. 
In other words, general reciprocity was offered, 
supposedly in good faith, but in reality, whenever 
grasped at, the package of favors was deftly pulled 
away by a string. That is, none of the reciprocity 
treaties — of which the French Treaty, studied with 
great care, is a good example — were allowed to pass 
the protectionist Senate. These are the well-known 
"Kasson Treaties," and they have furnished a 
complete test of the extreme protectionist senti- 
ment in the Congress of the United States, which, 
even under the urging of President McKinley, 
was unwilling to abate in any way the excesses 
of a very high range of duties long since shown 

46 



PROTECTIONISM AND RECIPROCITY 

to be out of joint with the progress of the age. 
No industry has yet been found willing to admit 
foreign competition for the sake of gaining a 
market abroad for the products of other in- 
dustries. Hence reciprocity, in practice, stands 
convicted as an absurdity. 

It is this situation, created by the increased rates 
of the Dingley act, which has excited against us the 
antagonism of Europe. Under the German "De- 
cember Treaties " the United States will be shut 
out from the status of a favored nation, unless it 
grants some reduction in return for the lower range 
of duties into Germany. The United States wishes 
Europe to admit its agricultural commodities at a 
low duty; while Europe wishes the United States to 
admit its manufactured goods on a like basis. This 
is the form of the present deadlock. 

In fact, the time is ripe for a campaign against 
the excesses and abuses of protectionism, if any 
party has the wisdom to see that courage is a source 
of success in American politics. The conflict has 
been waged about wool, woollens, and iron and 
steel. Woollen goods have received very heavy 
protection; but they do not show any marked in- 
fluences derived from the duties. The cotton, silk, 
and iron industries have all grown more rapidly 

47 



INDUSTRIAL AMERICA 

than the woollen; which shows unmistakably how 
distinctly other causes than the tariff must be con- 
sidered in studying the growth of an industry. For 
reasons quite independent of the tariff, the iron and 
steel industry has developed greatly; and now that 
we have become exporters of steel, steel no longer 
needs protection. The upbuilding of the silk and 
steel industries has been due to the introduction of 
new methods and new machinery. On the other 
hand, the heavily protected woollen industry is not 
in advance of the industry abroad, and it has no 
machinery superior to that used in foreign coun- 
tries. 

The woollen manufacturers have been handi- 
capped by the duty on raw wool. They accept this 
solely on the ground that the larger the number of 
interests dependent on the tariff, the stronger the 
body of defenders when any part of the system is 
attacked. If there were free wool, the woollen 
manufacturers would gain in many ways, especially 
in experience with a variety of materials as yet 
untried. The duty on raw wool, moreover, has not 
succeeded in increasing the flocks of sheep in the 
United States, nor has the high rate of the Dingley 
act kept up the price of wool. In 1905 the num- 
ber of sheep has decreased one-fourth since 1884, 

48 



PROTECTIONISM AND RECIPROCITY 

and although the ad valorem duty is the highest 
ever known, the imports of raw wool are greater 
than ever before. After eight years of the Dingley 
act, there are fewer sheep in the New England, 
Middle Atlantic, Northern Central, and Southern 
States than at any previous time, even when wool 
was admitted free. The reason is obvious; by 
division of labor, it is found that good farming land 
is more profitably used in raising crops than in 
pasturing sheep. Consequently, successful sheep- 
raising is practically driven westward, as fast as the 
land is taken up by farmers, until it has found a 
permanent home in the mountain regions of Mon- 
tana, Wyoming, Colorado, Nevada, Arizona, and 
New Mexico. There is no need of a protection for 
sheep in this region adapted to no other industry. 
In these places only have sheep increased in num- 
ber; but the growth will cease when the capacity of 
this range has been reached. In the East, sheep 
are kept only for mutton. 1 

Moreover, the consumption of wool has de- 
creased because of the increased use of shoddy and 
cotton in cloth formerly made of wool. In hosiery 
and knit goods, cotton has practically superseded 

l Cf. C. W. Wright, "Wool-Growing and the Tariff since 
1890," Quarterly Journal of Economics, August, 1905. 

49 



INDUSTRIAL AMERICA 

wool. In fact, whatever advantage there has been 

in the duty on wool has accrued to the cotton 

grower. 

in 

The United States has had high protection since 
1864; the United States has made marvellous prog- 
ress in the development of her resources and in a 
varied industrial expansion during the same period. 
Hence, some shallow reasoners — or some interested 
advocates — say: "The prosperity of the United 
States has been due to protection." No economist 
is deceived by this statement of the post hoc, propter 
hoc fallacy. During the time when I have been 
standing on the corner of a street in Chicago a thou- 
sand vehicles may have passed me: shall I argue 
that they passed by solely because I stood on the 
corner of the street ? It would be the height of folly 
for friends of the United States in foreign lands 
to refer to our country as an example of the happy 
results of protection. There is no denying the 
advantages of assistance in getting industries started 
that have no natural reason for their being here; 
but for these industries — which are legion — in 
which we have material advantages, the causes of 
our success are deeper than any enactments of 
Congress: our phenomenally rich stores of raw 

So 



PROTECTIONISM AND RECIPROCITY 

materials — coal, iron, copper, zinc, timber, oil, 
cotton — taken with the skill and racial advantages 
of our laborers, and the boldness and ingenuity 
of our managers, are, without question, the most 
powerful factors in building up our surprising pros- 
perity. It is, therefore, poor logic and poorer 
judgment to assign all the results of these great 
factors to anything so artificial as legislative enact- 
ments. At the best, protection could have had no 
more influence on our national development than a 
good rubbing by a trainer could have upon a man 
shaped by Nature as a great athlete. 

IV 

The origin of the protective system in greed and 
selfishness is plain enough. Whatever economic 
justification for protection there is, was brought 
forward only after its existence created the need of 
justifying its continuance. These economic prop- 
ositions need not here be introduced, since the 
argument for and against protectionism must be 
familiar both to economists and to the business 
world in all countries. It is not my duty in this 
place to argue for or against the tariff system, but 
to report to you scientifically and impartially, if I 
can, the exact facts and the truth about the work- 

5i 



INDUSTRIAL AMERICA 

ings of protectionism in the United States. Ob- 
viously, this is not an easy task, since no one can 
wholly detach himself from the prejudices and 
influences of his milieu. Yet some things become 
so plain, that he who runs may read. And one of 
these things is the inevitable outcome of the forces 
which gave birth to the system. 

Being a means of protection against foreign com- 
petitors, tariff duties are the legislative expression of 
an attempt by a government to direct, more or less, 
the private industries of a country. Such an at- 
tempt has a socialistic quality. Moreover, in the 
United States, at least, the continuance of this 
directing policy was dependent upon the success 
wdth which the protected interests could control the 
machinery of a political party, and through it 
secure the needed legislation. It will be recalled 
that, in its actual establishment in 1864, this policy 
was adopted in a time of great peril, under the press- 
ure for a great revenue, and that its enactment was 
unaccompanied by any debate or amendment what- 
ever. A measure which, on a great scale, brought 
private interests into the legislative halls; which 
has made a necessity of an unscrupulous lobby; 
which has opened the purses of millionnaire manu- 
facturers at every campaign; which has put at stake 

52 



PROTECTIONISM AND RECIPROCITY 

in our elections, not merely political principles, but 
the continuance of important industries; which has 
so far vitiated our electoral contests with questions 
of pecuniary rewards that it is impossible to obtain 
a fair and full discussion and settlement of great 
economic questions on their merits; a step which 
has poisoned the stream of justice in its very source 
in the law-making power — this measure was de- 
cided upon without reflection, and without discus- 
sion of its effects upon the character of our public 
men or upon the political atmosphere of the country. 
To a German audience the exposition of the 
American situation would not be clear unless it 
were prefaced with a statement concerning the seat 
of real political power. The President and his 
cabinet are executives, and they have only indirect 
influence on legislation. The party in power is 
governed by a group of political managers — com- 
monly known as the "leaders" — who direct the 
policy as to political issues in the elections, and who 
dictate the actual legislation for the party in Con- 
gress. These managers have the chief influence in 
drawing up the political platform to be adopted by 
the party convention; and thus are enabled to put 
behind proposed legislation the ostensible mandate 
of the popular vote which placed their party in 

53 



INDUSTRIAL AMERICA 

office. The machinery of the Republican party is 
in the hands of the protectionists, and the leaders in 
the Senate and House have direct control over the 
legislative policy on protection. The President 
and his cabinet, not being represented on the floor 
of Congress, can influence legislation only through 
patronage, or by stirring up outside public opinion 
in a way to affect the votes of members of Congress. 

As a lover of my country, it is a painful duty to 
explain the operation of some forces now at work in 
our political life; and only because, as a scientific 
student, I am expected to make a truthful report, 
could I be obliged to mention them here. 

Never has the upper house of Congress been held 
so cheaply by the citizen as it is to-day. The tra- 
ditional and honorable title of senator now covers 
the mountebank, the unscrupulous lumber or min- 
ing king, or the successful manipulator of State 
legislators through the use of corporation interests 
within the States. The demagogue who burns red 
lights before the masses to cheat them into the idea 
that he is a tribune of the people, and who is thereby 
voted into the Senate, is a clean person compared 
to the man who takes his seat in that august body 
knowing that he would not be there were he not will- 
ing to vote and act — not as the representative of all 

54 



PROTECTIONISM AND RECIPROCITY 

the people, but — as the attorney for large private in- 
terests. There are senators, it is true, of eloquence, 
ability, astute statesmanship, commanding learn- 
ing in the law, and high personal integrity; but it is 
also true at this very hour that a bill touching the 
interests of the sugar trust, or of many another 
great interest protected by the tariff, could not 
possibly pass the Senate. This is an unmistakable 
consequence of embarking on a policy by which 
industries are directly affected in their profit and 
loss by legislation. The concerns of the State as a 
whole become thus inextricably entangled with the 
pecuniary gains of special interests or of private 
persons. This situation would be black indeed 
if it were supposed that all who vote in favor of 
special interests do so because they are personally 
corrupt. This is not true. Very many senators, 
no doubt, vote according to the declared policy of 
their party, whether it is right or wrong; and others 
may honestly believe that protectionism or favors 
to the "trusts" are of advantage to the country. 

This explanation gives us the clew as to the rea- 
son why enormous sums of money are spent in our 
political campaigns. The American electorate 
is not more venal than that of other countries — 
such, for example, as that of England; but 

55 



INDUSTRIAL AMERICA 

a system under which the rise or fall of great indus- 
tries depends upon a vote of Congress, puts an 
enormous premium on the corrupt use of money in 
elections. When industries owe their existence, not 
to exceptional skill, situation, climate, or natural 
resources, but to a slender majority in a vote of 
Congress, the industrial situation must always be 
highly artificial and unstable. The questionable 
morals by which such an artificial situation is per- 
petuated from decade to decade cannot but leave 
its baleful influence on our politics and on the char- 
acter of many of our public men. But mark this: 
it could not in reason be otherwise when, in every 
national election — or in any election of State legis- 
lators — the prizes at stake are not merely the spoils 
of office (which, Heaven knows, are bad enough!), 
but the multitudinous interests of billions of in- 
vested capital. It may be that the material gains 
to industry from the protective system are so great 
and so highly valued that they vastly overbalance 
the moral degradation of our political life; but, if 
so, we ought to know the price we are paying, and 
fully realize it. 

So acute a politician as Mr. Chamberlain, in 
England, has taken a leaf out of the experience of 
the United States. Once establish protective du- 

56 



PROTECTIONISM AND RECIPROCITY 

ties, even at a low level — no matter on what grounds, 
imperial or local — and heavy campaign funds will 
inevitably be drawn to support the candidates of 
the party pledged to maintain the new duties. A 
new motive is introduced ; it is not whether you ap- 
prove this or that foreign policy, this or that posi- 
tion on the army, this or that educational scheme — 
but whether your personal pecuniary interests will 
be secured by the election of a certain man. There 
comes in the damaging confusion between polit- 
ical principles and self-interest — which is the very 
essence of bribery. As a consequence there arises 
a kind of candidate for office, not because he has 
convictions on public questions, but because he is 
expected to vote for iron, or for ale. There are thus 
created conditions which lower both the moral 
tone of the electors and the character of the public 
officials. What is the end in view? A group of 
party managers, once in power, can command un- 
limited money and active support in every test of 
power on the hustings; and as time goes on it can 
practically intrench itself in office behind the 
self-interest of industrial establishments. With the 
example of America before her, it is inconceivable 
that Great Britain should be willing to exchange 
the present high level of morals among her mem- 

57 



INDUSTRIAL AMERICA 

bers of Parliament for a class of men who place 
private interests above the true life of the state. 



Another of the preeminent points in the working 
of protectionism is its successful political strategy. 
In the field of politics, of course, opportunism and 
expediency are the sufficing principles of conduct; 
things must be done as planned, results must be had. 
It makes little difference what the past history of 
the party may be which is chosen as the agent of 
protectionism; but it makes a great deal of differ- 
ence to tariff men whether that party is in the habit 
of winning. It may seem passing strange that the 
party of Lincoln, which emancipated the slaves and 
preserved the Union, should in these days be the 
party of protectionism. The capture of the Repub- 
lican Party, and the success with which its name 
has become united with protectionism, is one of 
the most brilliant achievements of American poli- 
tics. To-day the managers of tariff legislation are 
far and away the most successful politicians in the 
country, and their methods show a consummate 
understanding of American human nature. 

The leaders of protectionism are in the Senate, 
and control that body. Thereby they are able to 

58 



PROTECTIONISM AND RECIPROCITY 

make their policy a continuing one, without any 
interruptions due to the election of a hostile major- 
ity in the lower house, or to a change in the Execu- 
tive. Moreover, the control of the press by jorce 
majeure is an instrument of great influence with 
the public. An extended chain of newspapers sup- 
ports all the policies of the Republican Party; and 
for the furtherance of these policies, the party lead- 
ers easily determine not only what should be said 
loudly, but also what should not be said. In fact, 
these men are astute in purveying to the press- 
agents, either a tentative scheme with which to 
sound the public, or the constant iteration of a 
necessary idea — such as that protection protects 
the workingman, or a careful suppression of dis- 
cussion on a critical question. 

The press and the labor unions have been very 
carefully inoculated with the doctrine that the level 
of wages in the United States depends upon the 
maintenance of the tariff. The well-managed 
organization of protectionists which secured dele- 
gates for Mr. McKinley in the two years before the 
convention met in 1895, have succeeded in estab- 
lishing a close association with important labor 
leaders. While the theory of a dependence of 
wages upon a system of import duties would have 

59 



INDUSTRIAL AMERICA 

no standing whatever in the world of scientific 
economists, it remains true that the fallacy has a 
strong hold on the labor leaders. This result is 
due to the very adroit strategy of the protectionist 
managers. When the revision of the tariff comes 
to an issue, it is quite likely that we shall see the 
anomaly of laborers supporting the policy by which 
their largest employers have obtained their special 
favors from the State. & * 

Especially effective, also, is the process by which 
any rising demand for tariff revision is met by the 
appearance in the press in all parts of the country of 
a warning that trade is in such a critical state that 
even a discussion of a change of duties would un- 
settle business. It must be remembered that the 
business constituency is the largest in the country, 
and that it is the most timid, most conservative 
class in the world. It dreads change, or any con- 
ditions which may cause a new adjustment of 
expenses of production to goods produced on or- 
ders. The party leaders, keenly alive to this state 
of mind, use it with telling effect. In a time of 
depression no change in the tariff can be made, 
because trade is so weakened that it cannot bear the 
shock; while in a time of prosperity, no one would 
be so foolish as to interrupt the stream of prosperity 

60 



PROTECTIONISM AND RECIPROCITY 

by threatening a change in the duties. The general 
result of this constant hammering on the public 
mind is a belief quite widely spread that the ex- 
travagantly high duties are necessary to prosperity; 
when, in fact, conditions have so changed since the 
war that many of the industries now need no pro- 
tection whatever, and most of them would, if put to 
the touch, find that they would have all the protec- 
tion they need with duties one-half, or one-third, of 
what they are now. 

These pretensions have sometimes been punct- 
ured by the tariff reformers; but the reformers, 
who have no pecuniary interest in legislation, are 
proverbially spasmodic in their political efforts, 
and they have been easily beaten by the clever 
politicians who know, at least, how to tire them 
out. At the present time, it is interesting to watch 
the process by which the protectionist managers 
are "holding down the lid," or keeping discussion 
quiet. There is no doubt whatever that the gen- 
eral body of thinking people is chafing under the 
burdens of our extremely high duties. It will be 
remembered that Heine said he had been con- 
verted from atheism by attending a meeting of 
atheists in Paris. Likewise, the extremes to which 
protection had gone in the McKinley act of 1890 

61 



INDUSTRIAL AMERICA 

produced a tremendous reaction against that policy. 
After that act had gone into effect, for once the issue 
of protection got fairly before the country in the 
congressional elections, and resulted in a defeat for 
protectionist candidates so overwhelming as almost 
to wipe out the Republican representation in the 
lower house. Such a blunder has never again been 
repeated by the party managers. Under no cir- 
cumstances will they allow the tariff to be the 
campaign issue, ostensibly because it will unsettle 
trade, but really because they do not wish any 
more such Waterloos. 

But the neatest work of the protectionist politi- 
cians has been shown in the manoeuvres on 
the money question. Quite overlooking the fact 
that courage is a great political asset, the Demo- 
cratic Party has long been without a backbone 
in its convictions. Not so with Mr. Cleveland. 
When his characteristic courage was allowed 
free play in the presidency, in a masterful 
way he forced the Democratic Party to adopt the 
policies of sound money and tariff reform. As a 
fact, the Republican leaders had, with what they 
regarded as astute statesmanship, been intriguing 
with the silver interests, and granting really dan- 
gerous silver legislation in return for votes in favor 

62 



PROTECTIONISM AND RECIPROCITY 

of protection measures. Mr. Cleveland's dominat- 
ing insistence on a gold standard, therefore, was 
a master-stroke of generalship. He occupied the 
ground in favor of sound money, which gave him 
the support of the business classes — both Republi- 
can and Democratic — and the tariff issue was one 
which shocked the Republicans as much as the 
sight of the cross would some evil spirits. In fact, 
the Republicans were left without an issue on which 
they could successfully go to the people. So long 
as Mr. Cleveland's influence in his party continued, 
the Democrats had every chance of continuing 
in power ; whereupon, as frequently before, the 
Republicans were saved by a colossal blunder of 
their opponents. The latter were so incredibly 
blind to the pivotal movement of the political game, 
that they allowed the Republicans to manoeuvre 
them out of the controlling position in favor of 
sound money. In short, Mr. Bryan was the 
salvation of the Republican Party and of protec- 
tionism. When the Democratic Party followed 
the ignis fatuus of Mr. Bryan's silver heresies and 
radicalism, it completely lost the support of the 
business classes, and went wandering in the bogs of 
failure and political annihilation. It was thus that 
the Republican Party has since been keeping the 

63 



INDUSTRIAL AMERICA 

money question tantalizingly open, inciting the 
Democracy to persist in its fatal programme, and 
shielding protectionism from discussion by keeping 
the money question in the centre of the stage. This 
will give you the situation as it stands to-day; the 
Republicans are unwilling to try the precedent of 
1890 and appeal to the country on the issue of pro- 
tection. The completion of legislation for the gold 
standard and the question of an elastic bank cur- 
rency are delayed so that they could be used as 
rallying points in future emergencies. 

And yet, as the fear of silver on the part of the 
public has been allayed, the general dissatisfaction 
with the tariff is again asserting itself. Therefore, 
you should watch with interest what other issue — 
perhaps railway control — will be held up by the 
Republican leaders as a shield to cover the modest 
body of our tariff legislation. 

VI 

At present the New England manufacturers and 
the western cattle interests are working together for 
lower duties, and a very strong demand is being 
made for a revision of the tariff, or for real reciproc- 
ity. It is urged that duties be removed from hides, 
coal, iron ore, lumber, and wood-pulp — or, in gen- 

64 



PROTECTIONISM AND RECIPROCITY 

eral, from raw materials. The answer to this from 
the leaders of the Senate is a system of maximum 
and minimum tariffs. The advocates of reciprocity 
would accept this system, if the maximum were no 
higher than now, and the minimum were set at 
twenty to twenty-five per cent below that; but such 
reductions under the "Kasson Treaties" have been 
relentlessly voted down. And it is difficult to see 
how the protectionists will meet the demands of 
Germany. Possibly this uncompromising attitude 
will lead to a wide-spread agitation for tariff re- 
vision ; for the general drift of public opinion is now 
against the maintenance of the antiquated and 
absurdly high duties now in force. Our insistence 
on the "open door' , is a farce, when we raise 
prohibitory duties before our markets. The Pan- 
ama Canal is a futile waste of money, since we 
forbid others to send goods to us; and it is more 
likely to aid the trade of other countries which 
are willing to admit raw materials free, and make 
reasonable concessions for the return trade of the 
world. 

In short, internal conditions all presage the 
necessity of action which will furnish a foreign 
market for the products of a stimulated production 
at home. Our great success in increasing our 

65 



INDUSTRIAL AMERICA 

exports in some industries has been due to excep- 
tional advantages, either in raw materials or in the 
evolution of new methods and new machinery. 
Of many other industries, it may be said that when 
raw materials are generally placed on the free list, 
Europe may then have more reason than now to 
fear our competition. These conflicts with other 
countries may oblige us to loosen the grip of the 
protection wild-cat which we are now carrying to 
our great disadvantage in foreign trade. 



66 



Ill 



THE LABOR PROBLEM IN THE UNITED 
STATES 

FOR one whose leg is broken, says an old East- 
ern proverb, the whole world limps. For 
the poor and those who are struggling to improve 
their condition in life, there is a universal sym- 
pathy confined to no one country. The aims, and 
the means of attaining the aims, of the laboring 
classes are a part of the common problem of in- 
dustry in all countries. In these days of quick 
transmission of ideas, doubtless the labor question 
in the United States has in it much the same ele- 
ments as in Germany, but the special forms in 
which the forces display themselves are likely to 
be different. And, in any event, the actual facts of 
the situation are of vital importance to a just under- 
standing of American industrial conditions at the 
present time. 

Yet in one respect our laboring force is unique: 
it is a conglomerate made up of nearly every race 
and every grade of human intelligence. Among 

6 7 



INDUSTRIAL AMERICA 

the unskilled laborers doing heavy physical work, 
there are the Chinese, Mexicans, Italians, Bohe- 
mians, Lithuanians, Irish, and negroes; among the 
unskilled inside employments are the French Cana- 
dians, Russian Jews, and others; among the agri- 
cultural workers are the Irish, the Scandinavians, 
and the Germans. And, in addition, above all 
others, are the American workmen. Obviously, 
it would not be possible to make many general 
statements which would be true of all these kinds of 
workmen, and of all the many distinct regions in 
a very great stretch of country. Yet, in spite of 
such diversity, the predominating characteristics 
which belong to that mixture of many races with 
English and Teutonic blood which we call Ameri- 
can are unmistakable. So far as possible within 
the limits of this lecture, I shall try to give you the 
main and important conclusions derived from a 
study of all these diverse elements. 

One of these appears in the marked class feeling 
between the employer and the employe, which is a 
part of the larger classification between those who 
have and those who do not have. This has not 
always been so. In earlier decades of our history, 
the antagonism between the employing and the 
laboring class was far less in evidence. With the 

68 



THE LABOR PROBLEM 

great increase of wealth, with the consequent envy 
excited by its proud display, with the growth of 
large cities, and especially with the influx of for- 
eign immigrants steeped in the socialistic tenets of 
Europe, there has come a pronounced change. 
The talk of arraying the masses against the pluto- 
crats is now frequently bandied about. 

In the earlier days the gap between the ordinary 
workmen and the employer was inappreciable; and 
comparisons between their possessions were not 
suggestive of ill-feeling. Daughters of self-respect- 
ing Americans, about 1840, worked in the cotton- 
mills of New England; and yet the wages were 
small as compared with those now earned by work- 
ers many grades lower in intelligence. In fifty 
years the actual money wages have doubled; the 
money buys more of goods lowered in price; and, 
at the same time, the hours of labor have fallen 
from fourteen or sixteen per day to eight or ten. 
These gains, moreover, were obtained before the 
activity of labor unions, and must be attributed 
directly to the increased productivity of industry, 
which, by increasing the efficiency of labor and 
capital, increased the quantity and value of the 
output, and thus allowed the capital its old remu- 
neration, and a large addition to the wages of labor. 

69 



INDUSTRIAL AMERICA 

The standard of living among workmen is higher 
than it has ever been, higher than it is among most 
competing nations. For these reasons the present 
condition of the laboring classes stands far above 
that of a century ago — or even of fifty years ago. 
Their material progress in that time has been great 
and unmistakable, 1 as may be seen on the ac- 
companying diagram, showing the movement of 
wages of unskilled labor from 1850 to 1900. Such 
being the admitted facts, why is there to-day a 
burning question involved in the claims of labor? 
Why is it that the labor question, like Banquo's 
ghost, will not down? 



If there have been such gains, why should there 
be such passionate discontent? In the main, it is 
because there has been an awakening of ambition, 
of desire for satisfactions. The very taste of good 
things obtained by the progress of the past has 
created an appetite for more. In addition to all 
that, however, has been the effect of seeing in recent 
decades rapid and great accumulations of wealth by 
all classes of men. Example is the strongest in- 
fluence on minds not yet guided by a cultivated 
1 From material prepared by Miss E. Abbott. 

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I 



THE LABOR PROBLEM 

intelligence; and the sight of material wealth all 
about is a tremendous stimulus to acquisition. 
There are many indications that this tendency has 
gone too far; and in too many places success is 
judged wholly by pecuniary results, so that the 
moral sense as to methods of acquisition has be- 
come blunted. And yet, on the whole, this dis- 
content is to be welcomed as a sign of healthy 
growth. In raising the level of a race, or a class, 
it has always been difficult to instil a psycho- 
logical desire for goods for the obtaining of which 
effort and self-control must be applied. For this 
discontent, therefore, the friends of progress must 
be grateful. 

In the upward movement of a class, even though 
the outcome remains sure, we shall have mistakes, 
or partial failures. Among the laboring classes 
there are virile and dutiful persons, just as there 
must inevitably be those characterized by igno- 
rance, stupidity, passion, suspicion, prejudice, and 
unreason. Even if a cause be just, the leadership 
may sometimes be corrupt. At present, while the 
yeasting is carrying the ferment far and wide, we 
may not expect the greatest sense of form from so 
heterogeneous a mass. It now behooves us, how- 
ever, to state the precise character of the demands 

7i 



INDUSTRIAL AMERICA 

made by the laboring class upon the managers of 
American industry. These demands best express 
the nature of the labor movement. 

The aims of workmen for a higher standard of 
living, increased wages, shorter hours, and better 
conditions under which their work is done, are 
quite generally understood. The especial force by 
which these aims are to be carried out is by organi- 
zation into unions, and the use of collective bar- 
gaining with employers. The exactions of laborers, 
of course, vary with the extent to which unions have 
been used, with the occupations, with the various 
regions of the country, and with the surrounding 
circumstances of trade and markets. Looking 
over the field, it may be possible to enumerate as 
follows the demands frequently made: 

i. Reduction of the working day to eight hours 
at the old rate of wages. 

2. Employment of only union men (the "closed 
shop") at a minimum, or uniform, "union scale" of 
wages. 

3. Workmen to decide how much work should 
be done in the day. 

4. A committee of workmen to be allowed in the 
shop to regulate and determine the conditions of 
work. 

72 



THE LABOR PROBLEM 

5. A shop steward, also to have general super- 
vision. 

6. The foremen, although the agents of the 
employer, to be union men, whose duty would be to 
guard the interests of the union. 

7. A walking delegate to be admitted to the shop, 
whose duty it is to see if the committee are attending 
to union interests. 

8. Goods to be marked "union made." 

9. Materials not to be bought from those em- 
ploying non-union men. 

10. Dismissals not to be made by the owner with- 
out the consent of the union. 

11. The union to regulate entirely the number 
and admission of apprentices. 

12. The open wearing of union badges in the 
shop, so that non-union men can be at once de- 
tected. 

13. Even if satisfied with wages, hours, and 
conditions of work, the right to strike in sympathy 
with other unions is reserved. 

It will be observed that, while the main demands 
must always be for higher wages, or for reduced 
hours at the same wages, the point about which the 
conflict is now raging most fiercely is the recogni- 
tion of the unions by the employers: on the one 

73 



INDUSTRIAL AMERICA 

hand, the workmen demand the employment of 
only union men, or the "closed shop," while on the 
other hand, the employers insist on the right to hire 
non-union or union men, as they please, or the 
"open shop." This desire for the recognition of 
the union in all negotiations with workmen is, 
clearly enough, a part of a larger plan to strengthen 
the position of the laborers in the bargaining 
process. 

This heated controversy over the open and closed 
shop is claimed to be peculiar to American condi- 
tions, since, in the general strategy, the non-union 
men have a more distinct place in the United States 
than elsewhere. It seems to me a brief statement 
of the claims of each side to this dispute will give us 
a definite understanding of the labor problem as it 
stands at present. In favor of the closed shop it is 
urged : 

i. Whenever the employers are hostile, the 
unions must force the uniform "union scale" of 
wages. To allow a non-union man to work in 
the shop would permit the employer to engage 
men at less than union wages. This would result 
in the disruption of the union. 

2. If non-union men are permitted to work at any 
rate of wages fixed by an individual contract with 

74 



THE LABOR PROBLEM 

the employers, the latter would bring in immigrants 
to break down the union scale. 

3. Of late the employers have begun to organize, 
and to meet their increased strength the unions 
must get themselves into fighting form. 

4. The spread of a confident individualism 
among employers lies back of the claim to employ 
whomsoever they please without dictation from the 
unions. 

5. Individual freedom in contracting with an 
employer ought to be sacrificed for the gains ob- 
tained by the unions for the whole trade, in shorter 
hours and higher wages. 

On the other hand, the arguments for the open 
shop are as follows: 

1. The minimum "union scale" is, in practice, 
the maximum; since an energetic man is fined by 
the union if he exceeds his stint. This is death to 
all individual ambition to rise in life, and the shirks 
successfully fall back on the unions for protection. 

2. The union scale is distinct from the market 
rate of wages; and in allowing non-union men to 
work, the employers are only accepting the facts of 
supply of labor in the market. 

3. Shops under union control must submit to a 
limitation of the output; and a lowering of the 

75 



INDUSTRIAL AMERICA 

quality of the personnel and of the character of 
the work turned out must be expected. 

4. If both are admitted to the shops, in practice, 
the non-union are persecuted by the union men. 

5. Unions exercise arbitrary coercion to prevent 
reasonable economies in shop practice. Shop rules 
are regarded as the sole prerogative of the unions, 
and are not arrived at by a conference between 
employer and workmen. 

6. Unions enforce their scale of wages in one 
locality disregarding the fact that lower wages are 
paid elsewhere by competing employers. 

7. Unions disregard all cost figures of producers, 
all influences affecting prices of goods, and all 
economic solutions of distributive shares. 1 

While a contest is now on in the printing trade, at 
present the open shop is maintained in the garment- 
making, metal- working, building, and other trades; 
and, of course, in the Government offices, such as 
the Government Printing Office at Washington. 2 

1 Cf. Seventeenth Annual Meeting (1904) American Economic 
Association, Part I, pp. 140-215. 

2 The unions demanded the dismissal of one Miller from this 
office solely because he was a non-union man. President Roose- 
velt promptly refused and protected Miller in his position. The 
unions, therefore, ordered their members to vote for Judge Alton 
B. Parker, Mr. Roosevelt's opponent for the presidency in 1904. 

76 



THE LABOR PROBLEM 



Having thus outlined the points at issue in the 
labor problem, it is desirable next to understand 
the basic ideas lying behind the concrete demands 
of the organizations. In all this parleying over 
wages there are some distinctly pronounced points 
of view quite commonly accepted. 

One of these, and the one strongly intrenched 
in the thinking, or prejudices, of the masses, is a 
theory of a right to ownership in the product and 
the consequent claim to an unlimited extension of 
the amount to be paid to labor. So long as great 
fortunes are accumulated in the United States, the 
fact itself is taken as a proof that labor is not 
receiving its due share of the results of production. 
It is believed that additions to the wages of labor 
can be exacted as long as any large profits are 
taken out of a business by the owners. The rank 
and file of the laboring class fully believe that there 
is no economic reason why the wages, for instance, 
of a plumber, now receiving $4.00 a day, should not 
be increased to $10.00, or even to $50.00 a day. As 
a consequence of this widely accepted belief, when 
by strikes and pressure the employers are led to 
give an increase of wages, it must not be supposed 

77 



INDUSTRIAL AMERICA 

that this rise will produce satisfaction and peace. 
Far from it : the grant of the increase is regarded as 
evidence that more will be disgorged of what be- 
longs by right to labor, if only pressure enough is 
applied to the employers. Give an inch, and very 
soon an ell will be demanded. The theoretical 
basis, therefore, of much of the agitation for higher 
wages is to be found in the belief that large fortunes 
are necessarily accumulated at the expense of the 
laboring class. And this point of view explains 
clearly why there is such eagerness in certain quar- 
ters to legislate against large fortunes. 

The extension of such views to millions of per- 
sons, and embodied in acts of conduct to other 
classes in the community, lends importance to the 
necessity of judicial and profound study by econo- 
mists of the principles regulating the rates of wages, 
interest, and managerial ability. But the influence 
of scientific economics in this field in America is 
practically nil. Among the laboring classes it is 
not to be expected that there should be any impar- 
tial study of distributive shares. Practically only 
those pages reach them which support the acts and 
positions of the labor leaders. Tenets favorable to 
their contentions are assumed as fixed, and criti- 
cism of them is usually regarded as an expression 

7 8 



THE LABOR PROBLEM 

of hostility to the cause of labor. Such a situation, 
it will be seen, results in rigidity of opinions, nar- 
rowness, intolerance, suspicion, and is pregnant 
with possibilities of explosions whenever the facts 
war against these a priori conceptions. It leads to 
questions how the wisest thinking of the day may 
be most successfully spread among these millions 
who are hedged off from the influence of scientific 
economics. 

In the main, the literature of socialism and 
unionism is indistinguishable. Of course many 
unionists are not socialists; but the literature 
actually read, if at all, by the unions, is the inheri- 
tance of Marxianism, a brew of all the different 
theories of European radicals, assuming specific 
form or expression according to the individuality 
and eccentricity of the prophets of the "new 
order." From this source is derived the common 
belief that it is labor which has created the value in 
the product of industry. There is no denying the 
wide-spread diffusion of this idea; and it inspires 
the unions to make practical demands based upon 
this theory. In the Homestead strike, some years 
ago, a very emphatic claim was made by the la- 
borers to ownership in the establishment. Such 
points of view may be visionary, but their enforce- 

79 



INDUSTRIAL AMERICA 

ment by unions in specific acts makes up a part of 
the practical situation which employers have to face. 
Whether labor creates the value of the product 
or not, there is an unmistakable belief in another 
policy whose justification is difficult to find. There 
is no doubt whatever that restriction of the output 
— or "making work" — is widely prevalent; and yet 
its existence is frequently denied by the unions. 
The basis of this policy seems to be found in the 
history of its origin given by labor leaders. 1 It 
is claimed that the employers, wishing to get the 
maximum work out of the laborers, introduced 
an unusually swift workman, called a pacemaker, 
whose results must be equalled by all other work- 
men. Or, if piece-work were introduced, when 
very active men began to earn high daily wages, the 
price paid per piece was reduced, so that ordinary 
effort earned very low wages. To meet this policy 
of grasping employers it is said that the unions 
found the limitation of output to be necessary. 
This explanation, however, is disingenuous. With 
most laborers there is a belief that work, or employ- 
ment, is limited, and if a particular job can be pro- 
longed they get so much more out of the employer. 
That such acts are ruinous to the efficiency of pro- 

1 Cf. Thomas I. Kidd, Amer. Econ. Assoc, ante cit., p. 196. 
80 



THE LABOR PROBLEM 

duction, raise the prices of products, and prevent 
employers from getting contracts and offering future 
employment, seems beyond the vision of many 
unions. As a rule, they demand all they can get, by 
dint of threats and force, and leave it to the employer 
to overcome the increased cost as best he may. 

Besides these ruling doctrines, there is — most 
important of all — the accepted conception of the 
union itself. Here, it should be emphasized, we 
are at the very root of the whole matter. The 
unions are basing their action on the principle of 
a monopoly of the supply of laborers in a given 
occupation. A monopoly is obviously effective in 
regulating the price of anything only if the monop- 
oly is fairly complete; it must control the whole 
supply. Moreover, there must be a demand suf- 
ficient to take off all the existing supply, or the 
price is likely to fall. Thus, there must not only be 
an active demand for labor from employers, but, 
in order to regulate the price, the unions must con- 
trol all of the labor then available. This, in brief, 
is the real stumbling-block of unionism in America. 
In fact, the unions include only about seven per 
cent of the total body of laborers. 1 This result is 

x In 1900 there were 29,074,117 (23,754,205 male) persons en- 
gaged in gainful occupations over ten years ago. John Mitchell 

81 



INDUSTRIAL AMERICA 

true in spite of the proclaimed intention to include 
in a union each worker of every occupation, and 
then to federate all the unions. In some one lo- 
cality, however, it is possible that all of a certain 
employment may be included in the membership. 

In view of these facts, the theory of a monopoly 
effective over the whole supply fails, and becomes a 
theory of an artificial and only partial monopoly 
working to establish a price above that which will 
insure the employment of the whole supply of 
competing laborers. This situation, consequently, 
means always and inevitably the existence of non- 
union men, against whom the unions must con- 
stantly wage war. Under this system high wages 
for some within a union can be maintained only by 
the sacrifice of others without the union. In short, 
the union scale of wages can be kept only by driving 
all other competitors from the field. The monop- 
oly is only artificial, not real. 

It will be objected by union leaders that it is 
their policy to gather every laborer into the union, 

(Organized Labor, p. 87) reports, in 1902, 10,705 delegates to the 
American Federation of Labor. At 100 members for each dele- 
gate, the legal membership should be 1,070,500. Writing a short 
time after, Mr. Mitchell estimates the actual membership at about 
2,000,000. Probably this is now too high a figure, because of dis- 
sensions among the members, and failures of strikes. 

82 



THE LABOR PROBLEM 

and thus eventually control all the supply in an 
invincible monopoly. The unions, however, do 
not admit all comers, 1 although the practice varies. 
But if all laborers were unionists, the situation 
would be the same, as regards supply, as if there 
were no unions. In that case, could the unions 
maintain the "union scale" of wages? Not if the 
union scale is above the market rate. If the whole 
supply of laborers is thus introduced into the field 
of employment, then the rate of wages for all in any 
one occupation can never be more than that rate 
which will warrant the employment of all — that is, 
the market rate. Also, wholly aside from the in- 
fluence of demand, in order to control the rate of 
wages the unions which include all laborers must 
effectually control, not only immigration, but also 
the birth rate. The impossibility of such a control 

1 "Machinery has robbed many industries of the old-time skill 
required by the artisan. The logical outcome of a lack of an ap- 
prenticeship system would be that boys would fill our shops and 
factories at a much lower wage than is now received by men. The 
men would be walking the streets in a vain search for employ- 
ment. This might result in lessening the cost of production to 
some degree, and to that extent the public might be benefited, 
but society on the whole would lose more than it would gain."— 
Thomas I. Kidd, Amer. Econ. Assoc, ante cit., p. 198. This 
quotation is a full admission of the impossibility of keeping up 
wages, if unions admit freely all who apply. 

83 



INDUSTRIAL AMERICA 

every one knows. Hence there is little hope for 
permanently higher wages by this method of ac- 
tion. 1 

m 

Having now in mind the nature of the demands 
made by the labor unions and the doctrines on 
which they are based, we are in a position to de- 
scribe the actual means by which these demands 
have been enforced in America. 

The labor organizations have been used both 
for good and for ill. A man may properly carry a 
stick for defence; but he would not be permitted to 
use it at random on women and children in a busy 
street. Likewise, a labor organization is power, an 
admirable weapon of defence; but whether it is a 
good or bad thing depends upon the use to which 
the power is put. At the time of the great strike 
against Jay Gould's Missouri Pacific Railway, about 
1877, the organization known as the Knights of 
Labor possessed the sympathetic support of the 

1 For an attempt to show that— the facts being what they are — 
the only hope for higher wages is to give up the impossible scheme 
of a partial monopoly of supply and to adopt the principle of in- 
creasing productivity by added skill and efficiency, see the writer's 
article on " The Hope of the Labor Union," Scribner's Magazine, 
November, 1905. 

84 



THE LABOR PROBLEM 

whole country. When, however, under Martin 
Irons, the breaking of heads of non-union men and 
the burning of property in East St. Louis entirely 
alienated public sympathy, it was seen that rioting 
and violence were not the best means of accom- 
plishing the ends of the unions. Soon after, the 
outbreak of Anarchists at Haymarket Square, 
Chicago, in 1886, in which the police were murder- 
ously assaulted, the labor unions were forced by 
public opinion to declare that their membership 
had been purged of all Socialists. Deprived of 
force, the unions next applied the boycott, which 
at the time was believed to be the most effective 
weapon ever devised. In the end the boycott was 
held to be a form of conspiracy to destroy another's 
business, and was declared illegal by the courts. 
Finally, the unions tried politics; and in almost 
every case the clever party managers have been able 
so to control labor leaders as to use the union votes 
for partisan purposes. Such was the gamut run 
in a few years by the earlier organizations of 
labor. 

At the present time strikes and boycotts are the 
means most resorted to by the unions. As a result 
of long experience, strikes have come to be regarded 
as the one practical instrument to gain their ends. 

85 



INDUSTRIAL AMERICA 

The following statistics 1 will give a general sum- 
mary of what has taken place : 

From 1 88 1 to 1894 there were 14,389 strikes in 
69,166 establishments, throwing 3,714,231 persons 
out of employment (of which 91.22 per cent were 
males). The average duration of strikes was 25.4 
days. Strikes in 44.49 P er cen ^ °f the establish- 
ments succeeded, 44.23 per cent failed, and 11.25 
per cent were partially successful. In the success- 
ful strikes 1,188,525 persons (or 32 per cent) were 
thrown out of employment; in strikes which failed, 
2,061,259 (or 55.5 per cent). The losses to work- 
men were $163,807,657 in wages, $10,914,406 in 
assistance granted by unions to members, while the 
losses to employers were $82,589,786. 

In the period from January 1, 1887, to June 
30, 1894, the relative importance of the causes of 
strikes was as follows: For increase of wages, 
25.69 per cent; for reduction of hours, 13.23; 
against reduction of wages, 8.17; sympathetic 
strikes, 7.73; for increase of wages and reduction of 
hours, 6.60; against employment of non-union men, 
3.60; for adoption of new scale, 3.33; for recogni- 
tion of the union, 2.80; and so on. 

1 Report of Commissioner of Labor, 1894, vol. i. The figures 
for lockouts are also given in this report . 

86 



THE LABOR PROBLEM 

These few figures will give a general record of 
the external results of the conflicts between laborers 
and employers; but we should look deeper into the 
internal results. In this search two considerations 
project themselves above all others: (i) the vio- 
lence too often attendant upon strikes ; and (2) the 
questionable character, ability, and wisdom of 
some labor leaders. 

1. Inasmuch as the unions, particularly those 
composed of the unskilled classes, contain only a 
fraction of the available labor force, the existence of 
a large body of non-union men is a rock of offence 
standing in the way of their getting a rate of 
wages above that market price at which all of the 
supply could be employed. Hence a passionate 
hatred of the non-union man, or "scab," who is 
charged with being a traitor to his class, if he ac- 
cepts less than the union scale. Although possess- 
ing only a partial monopoly, the unions act as if 
they had a complete monopoly of the labor supply; 
and, in spite of certain failure, they have created a 
code of ethics which justifies any act, whether il- 
legal or unjust, which helps to maintain the arti- 
ficial monopoly. The whole point of the union 
demands is admittedly that the "union scale" is 
above the market rate fixed by open competition. 

87 



INDUSTRIAL AMERICA 

Obviously the union rate can be maintained only 
by limiting the supply of labor to members of the 
union, and by driving out the non-union competi- 
tors. Consequently, the inevitable outcome of the 
present policy of many labor organizations is law- 
lessness, and an array of power against the State. 
Having only an artificial monopoly of labor, their 
purposes can be successfully carried out only by 
force and intimidation. 

An account of the brutal war carried on between 
union and non-union men would form very un- 
happy chapters in the life of our people. It calls 
forth the lowest passions of men who have not yet 
found the way to any moral growth; and, worst of 
all, it seems to befog the ethical vision of those who 
have had full opportunity for knowing what is right 
and wrong, and what is good and bad for the State. 
The great mass of the laboring body is honest and 
law-abiding; the responsibility for the erroneous 
policy and its criminal consequences must be placed 
on their leaders, and on some economic advisers 
who have more heart than brains. The crux of the 
whole matter is in the incomplete control of the 
supply of labor by the unions. 

It is an indisputable fact to-day that if law and 
order were enforced, if an employer were allowed 

88 



THE LABOR PROBLEM 

without hinderance to hire any man he chose, if 
these men could go peacefully to work and be un- 
molested in the streets, if their families were not 
boycotted, a strike would almost never succeed. 
This is due to two things: (i) the large supply of 
competing labor; and (2) the fact that the very 
general introduction of machinery into all indus- 
tries has reduced the necessity of having especially 
skilled men in as many processes as before. "A 
non-union contractor, with his lower wages and 
imported labor, would soon drive the union con- 
tractor out of business." * "The non-unionist is 
always the danger to the wage-scale." 2 There is 
no doubt upon this point. It is, therefore, sheer 
stupidity, without control over the whole supply of 
labor, to keep on trying to force the adoption of the 
union scale. It is not the fault of the non-union 
man that he must accommodate himself to the mar- 
ket conditions of labor. He is a human being, 
and has rights as well as union men. Moreover, 
non-union men can soon better the output of union 
men who restrict product. In certain shops in 
Chicago making printing-presses, heavy conveying 

^ohn R. Commons, "Causes of the Union-Shop Policy," 
Amer. Econ. Assn., ante cit., p. 156. 
2 John G. Brooks, ibid., p. 163. 

89 



INDUSTRIAL AMERICA 

machinery, sewing-machines, machine tools, steam- 
valves, mill and mining machinery, and the like, a 
strike threw out of employment some 1,500 of pre- 
sumably skilled workers. Almost immediately the 
shops were filled with new men, few of whom had 
ever done this kind of work. Within three months, 
with the same hours per day, the green hands 
equalled or exceeded the output of those who had 
had years of experience. In fact, the potential 
adaptability and ingenuity of great numbers of 
American laborers must always be taken into ac- 
count, as well as the fact of the whole supply. 

In short, the unions act as if an increase in the 
rate of wages could be determined by demands 
upon the employers, when in reality it is prevented 
by the actual facts of the supply of labor. Under 
these conditions the necessity of intimidating non- 
union men, of catching employers at a critical emer- 
gency when refusal is wellnigh impossible on any 
grounds, has become a fine art. There has thus 
been created a situation out of which has arisen a 
dangerous class of labor leaders. It is not claimed 
that all leaders are of this kind — far from it. But 
the situation — wrong and artificial though it is — 
demands a leader who will not stop at anything to 
gain his point. "Peaceful picketing" has become 

90 



THE LABOR PROBLEM 

only a synonym for threats of violence. For a long 
time it has been believed that unions employed 
professional thugs to intimidate scabs and employ- 
ers; and recently this has been carried on openly. 
The funds have been appropriated under the head 
of " educational methods." In fact, picketing, boy- 
cotts, breaking heads, even murder, have been re- 
sorted to to carry out the demands of the union 
based on a theory that is economically inde- 
fensible, 1 

2. It is a sad outlook for the honest majority of 
the laboring class. They are not to blame. Un- 
trained in economic analysis, they necessarily trust 
themselves to the policy set by their leaders. Among 
these there are many men of character and force; 
but, on the other hand, there are some dishonor- 
able, unscrupulous, lecherous, and pig-headed men, 
who would be a disgrace to any penal colony. 
Corrupt leaders of this sort threaten employers with 
strikes and obtain "blackmail," which is appro- 
priated for their personal use and indulgence. The 
ignorance, lack of business habits, and helplessness 

1 " I do not consider anything a violation of an agreement that is 
done to uphold the principles of trades-unionism." — C. P. Shea, 
President of International Brotherhood of Teamsters. He repre- 
sents the worst type of labor leader. 

91 



INDUSTRIAL AMERICA 

of the laboring classes has been seized upon by 
clever and designing men as a means of fattening 
their own purses, and getting the resources for the 
indulgence of their lowest vices. Leaders of this 
sort, who would never be trusted in business life, 
find themselves in possession of tremendous power 
over the prosperity of great industrial concerns, 
over the convenience of the public, and over the 
very security of women and children in the high- 
ways and busy streets of the community. They 
will even embezzle the union funds — contributed 
painfully in small sums by the men who toil — and 
join in schemes for looting other union treasuries, 
by calling strikes. Employers have not been slow 
to see how to use such men for their own interest; 
and a group of employers in agreement with a group 
of unions have formed a combination to monopolize 
the work and trade in certain occupations. 

Nor has the bad influence of such leaders 
ended here. They have not hesitated to solidify 
their positions by bargains with local political 
managers to deliver the vote of the unions to cer- 
tain tickets. In some cities the mayor who is de- 
pendent upon the labor vote for his reelection has 
been put under such pressure by these leaders that 
the police force has been kept from preserving order 

92 



THE LABOR PROBLEM 

when the union men are assaulting " scabs." In 
ways such as these, acts of violence and forms of 
rioting, which are a disgrace to civilized society, 
are tolerated or winked at. And the effects of such 
doings are far-reaching. When youths of the la- 
boring class observe that arrogance, bluff, and the 
appearance of force are a sufficient protection for 
insufficiency, or even for crime, they are not likely 
to grow up with a respect for the law. 

Among the organizations which have been called 
into being by the labor disturbances of recent years 
is one known as the Civic Federation. Its function 
seems to be that of a clearing-house for the claims 
of both employers and employes, and to promote 
conciliation. So far its work has appeared, on the 
surface, to consist of discussions by prominent men 
upon the questions at issue; while under the surface 
the relations of powerful political managers from 
the Republican Party to this organization seem to 
imply some other kind of activity. Thus far, the 
conduct and temper of unionist leaders does not 
show any influence from this source. Since this 
organization has been in existence, we have wit- 
nessed the most bitter contests between employers 
and employes and the most barbarous violations 
of law and order yet known in our history. 

93 



INDUSTRIAL AMERICA 

In actual practice an organization representing 
the employers in a given industry meets an organi- 
zation representing the employes — or, as they have 
been described, the House of Lords and the House 
of Commons — and they discuss the demands and 
counter-demands in regard to wages and conditions 
of work. After each side has learned to fear the 
other, resort is had to negotiation rather than 
to arbitration. Trade agreements * of this nature 
have been made in half a dozen of the leading 
industries of the country, such as shipping on the 
Great Lakes, bituminous coal-mining in some 
states, stoves, and the like. 

IV 

The imagination of those who are appealed to by 
union leaders is often quickened by pictures of the 
coming industrial democracy. It is intimated that 
the labor disturbances are but the evidences of an 
awakened consciousness among laboring men by 
which they are to evolve a new organization of 
industry, wherein all shall be equal, and all shall 
have their rights. The exact nature of the plan is, 
of course, vague; in reality it represents the widely 

1 Cf. J. R. Commons, Trade Unionism and Labor Prob- 
lems, 1905. 

94 



THE LABOR PROBLEM 

spread desire for a higher standard of living and the 
opportunity for more life — educational, spiritual, 
and political. No one can have the slightest desire 
to diminish the value of these ideals; in all ways the 
objective is praiseworthy. 

However admirable the objective, still in practice 
we are obliged to examine the means by which 
the end is to be accomplished. In the main, any 
philosophy which attempts to separate the interests 
of the laborers from those of the other agents in pro- 
duction is foredoomed to failure, economically and 
politically. But, in American experience, the fact 
which projects itself above all else is the patent 
inability of any one class, largely uneducated, with 
a narrow horizon, influenced easily by suspicion 
and passion, to keep out of the hands of interested 
and corrupt leaders who will use their membership 
for personal advantage; and the extreme unlikeli- 
hood that such a class will be enabled, of itself, to 
work out the life-principles of an economic and 
political development distinct from the long growth 
of civil liberty of which we are now enjoying the 
fruits. 

In their essence these ideals are more or less 
closely identified with socialism. It is to be noticed 
that any suggestion of intervention by the State, or 

95 



INDUSTRIAL AMERICA 

by the municipality, is eagerly welcomed by the 
mass of those who make up the working classes. 
Nor is the reason far to seek — socialism is the phi- 
losophy of failure. It is the unconscious reaching 
out of those who have been materially unsuccess- 
ful, or often of those who look enviously upon others 
who have more of wealth than they, to induce the 
State to do for them what they as individuals have 
been unable to do for themselves. This point of 
view will explain why the general body of labor 
unions so invariably rush to the support of munic- 
ipal ownership of public utilities. The general 
belief is that if the city will own the street railways, 
or the gas-plants, the employes will be given higher 
wages, or the consumers cheaper gas. Too often it 
is never considered that these special favors are 
paid for by the general taxpayer. But, in the 
main, the outcome in America would be an en- 
largement of the political "machine," composed of 
all city employes, who would become a serious 
menace to our political progress in all other direc- 
tions. The support accorded to all recent prop- 
ositions for municipal ownership by all wings of 
socialistic believers is, at least, very significant. 

Certainly, if out of the struggles of those who 
proclaim the coming of an industrial democracy 

96 



THE LABOR PROBLEM 

we are to have evolved as leaders the kind of men 
who have been brought to the front in the past by 
labor unions, the future is not very hopeful. But 
I think we need have no fears on this account ; for 
the future is sure to educate the laboring classes 
in the choice of leaders, as well as in other things 
really essential to their improvement. 



Having thus detailed the actual operation of 
union policy in the United States, we may, in 
conclusion, make some references to the future. 

To the extent that labor unions succeed in forc- 
ing a higher rate of wages without a compensating 
increase in productivity, American producers will 
be hindered in their efforts to undersell foreign 
competitors. But it is to be remembered that other 
countries have their labor troubles as well as we, 
and that our industrial progress is not, in the long 
run, likely to be much restrained on this account. 
The reign of corrupt and incompetent labor lead- 
ers has created an intolerable condition of affairs 
which cannot last forever. Sooner or later the 
latent honesty and the growing intelligence of the 
working class will slough off such vicious guidance. 

Should the unions also gain in economic insight 
97 



INDUSTRIAL AMERICA 

enough to abandon the policy of an artificial monop- 
oly and set themselves energetically to developing 
their productivity, thus making unionism synony- 
mous with skill and efficiency, they will obviate all 
necessity for war and violence against the man 
outside the union. If this consummation is ever 
reached, the efficiency and competitive power of 
American industry will receive such an impetus as 
it has seldom, if ever, known before. With the 
diffusion of economic knowledge and the growth 
of intelligence, the productive quality of our work- 
men is sure to improve. At present the manual 
and technical education for the laboring class of the 
United States is far inferior to that of Germany, 
but there are signs that a change for the better 
is coming. The general education of the public- 
school system is effectively given to all of every 
class in the community; and trade schools are no 
longer unknown. In time, technical training will 
be offered as a part of the free-school system. 

It will not do to regard the struggles of the la- 
boring classes, and the frequent scenes of violence, 
as signs of the disintegration of the American 
political fabric. It is true that some organizations, 
led by radicals or by corrupt leaders, are riding for 
a fall. There are limits to human patience. But 

9 8 



THE LABOR PROBLEM 

the general ferment in the field of labor is but the 
sign of an awakening desire for better things on the 
part of a virile and ingenious race; and it will end in 
a higher standard of living. Nor is it to be sup- 
posed that this elevation of the laboring class will 
bring with it an increased expense in producing 
goods; quite the opposite; the gain in standard is 
likely to be the index of a gain in the productivity 
of industry. The dust of battle may dim this 
picture from time to time, but the final result is 
not difficult to see. Through the tribulations and 
struggles of the labor unions, they will in the end 
come to learn the value of intelligence and character 
in imparting foresight, saving, business judgment, 
honesty, skill, and industry. As all the world 
limps for one whose leg is broken, so all the 
world should rejoice for one who becomes well 
and prosperous. 



99 



IV 

THE " TRUST" PROBLEM IN THE UNITED 
STATES 



THE discovery, or unfolding, of a new force by 
science sets at work the best-seasoned and 
most brilliant minds to analyze the nature of the 
new force, and to ascertain the practical methods 
of controlling and applying it for the highest uses 
of mankind. What is true of a scientific force 
is in a similar way true of the new economic 
power disclosed in the great capitalistic combi- 
nations of recent years. Although, in the main, 
the large new power differs from the old embryo 
power only in degree and not in kind, still the 
power of the new combinations has become so 
enormous as to require an entirely new adjust- 
ment of industrial and political relations. In 
this process of adjustment, just as in past cen- 
turies of civic struggles to secure safety from the 
dangers of the great political power of kings or 
privileged classes, we are to-day confronted with 

ioo 



THE "TRUST" PROBLEM 

the actual necessity of harnessing great economic 
powers by such checks and balances as will, 
while preserving to society their undeniable ad- 
vantages, at the same time protect all men in the 
enjoyment of equal industrial rights. 

These unparalleled aggregations of capital un- 
der one management — for which we may accept 
the popular name of "trust" — are of very recent 
origin. Attempts to regulate prices in some one 
industry, like cordage, or salt, without taking over 
the management of the constituent companies, 
were made as early as 1860-68, under the 
name of "pools." In fact "pools" had been tried 
by the railways. Such organizations were not 
strong enough to accomplish much, because 
weaker members were often suspicious that the 
stronger ones got more than their proportion of 
the business; because any member could with- 
draw from the "pool" without notice; and be- 
cause pooling was not enforceable by the common 
law, and was finally forbidden by the Sherman 
act of 1890. 

The weakness of "pools" was early perceived 
by Mr. John D. Rockefeller, and led to the creation 
of the Standard Oil Trust in 1882, and in 1887 of 
the Distilling and Sugar Trusts, by which the 

101 



INDUSTRIAL AMERICA 

agreements of the combination were given a bind- 
ing legal force. The constituent companies as- 
signed their stock, with voting power, to trustees 
who issued in return certificates representing the 
valuation of the separate plants. The " trust," 
therefore, established an absolute control over the 
separate properties, all executive officers of the 
various companies being elected by the trustees, 
and dividends being distributed to all holders 
of certificates whether the properties represented 
were idle or not. A trust is not an incorporated 
company, and thereby not being required to make 
reports, could maintain entire secrecy as to its 
operations. Its power resided in its ability to 
unify the action of all its members. In the end, 
however, the peculiar nature of the trust led 
to its abandonment; being only an association in 
the eye of the law, and not a legal persona, like a 
corporation, it could be declared illegal by the 
legislature of any one State. An outbreak of 
hostility, beginning with Georgia in 1877, brought 
forth, about 1894, an ti- trust laws in a majority of 
the States in the Union. Hence the special form 
of " trust" ceased to be used by large combinations 
after about 1891-92, although the designation is 
still given them in popular discussions. 

102 



THE " TRUST" PROBLEM 

In the early part of the nineteenth century the 
law had provided in the form of corporations a 
means for meeting the necessity of collecting a 
comparatively large capital for single enterprises, 
such as docks, bridges, and the like, in which no 
one investor was willing to risk the whole amount. 
In brief, the corporation was a democratic device 
by which any one, although unskilled in business 
or in technical processes, could, if able to buy a 
share, participate in the largest industrial opera- 
tions. After a long experience with corporations 
in the past, they have proved to be the legal form 
to which large combinations have finally resorted, 
in the last few years, when the trust was found 
to be unsuited to their purposes. Instead of ex- 
changing trust certificates for the stock of con- 
stituent companies, shares in a central corpora- 
tion are used; and the centralized power thus 
obtained is quite as great as under the trust. 

The period of 1882 to the panic of 1893 was the 
time of trusts pure and simple. In the depres- 
sion following the crisis, little activity was shown 
by combinations; but from about 1898 to 1903 
the creation of new organizations on a large scale, 
under the guidance of promoters, has been un- 
paralleled in the history of finance. In this time 

103 



INDUSTRIAL AMERICA 

of phenomenal expansion, a new device, in the 
process of evolution, has appeared in the form 
of the "holding-corporation." As early as 1889 
New Jersey had passed an act permitting the 
existence of holding companies, which, of course, 
could operate in any other State. By such a con- 
trivance, a central company need not buy the con- 
stituent properties outright, because an owner- 
ship of fifty-one per cent of the stock of separate 
plants would give entire control over their manage- 
ment. The American Sugar Refining Co. was prac- 
tically the first to adopt such a scheme,when it aban- 
doned the trust form of organization; and, in 1895, 
the Supreme Court of the United States * declined 
to deny a legal status to such companies. Among 
the great number of combinations at this time 
may be mentioned, as prominent examples, the 
Amalgamated Copper Co., with a capital of $75,- 
000,000 in 1898, and the United States Steel Cor- 
poration with stocks and bonds to the amount 
of $1,400,000,000 in 1901. Before 1897 only sixty- 
three combinations were said to have been formed ; 
but in the year 1899, alone, seventy-nine were or- 
ganized, and the total capitalization of so-called 
trusts is now beyond $4,000,000,000. 

1 U. S. vs. E. C. Knight Co., 156 U. S., I. 
104 



THE " TRUST" PROBLEM 

II 

The reason for the existence of the great 
trusts is not far to seek. The immediate cause, 
however, is not always the underlying cause. In 
the case of the Steel Combination, the immediate 
cause was the necessity of avoiding a ruinous war 
between the Carnegie and other interests; and 
the escape from fierce competition has been the 
object in many other instances. The existence 
of competition, however, is only the indication of 
forces working underneath. Capital has been 
growing in the United States pari passu with the 
increase of wealth and with the opening up of new 
resources. Transportation of the new products 
becomes an important factor in the selling price 
in a country of great distances. In any one in- 
dustry, old establishments expand under new de- 
mands, but at the same time new plants spring up 
in places nearer remote markets; and increasing 
business supports them all in prosperous times. 
The growth of new capital stimulates new enter- 
prises; but all are at last, and especially in lean 
years, fighting fiercely for a share of the trade. 
Then comes the inevitable elimination of the unfit. 
Next follows the squealing from those who can 

105 



INDUSTRIAL AMERICA 

never admit that ill success is due to inferiority. 
In the main — barring the inevitable errors due to 
human nature and friction — the outcome of large 
organization, uniting most of the plants in one 
industry, is the survival of the most productive 
forms of business. 1 

The collision of industrial rivals in unrestrained 
competition brings to the front the most fit. 
Under the system of small and separated pro- 
ducers it was inevitable that in some places the 
management should be wasteful, clumsy, slow, 
ignorant, and inefficient. Once combinations were 
tried the clever men of a community were quick 
to see where a better organization could improve 
on the shortcomings of the old. 

Again, the combination was undoubtedly re- 
sorted to with the expectation of controlling, if not 
of monopolizing, the market, and gaining a steadier 
range of profits than could be obtained under 
fierce competition. Direct, or, at least, potential 
competition would, however, still exist as a pre- 
ventive of prices high enough to allow the small 
producer again to take possession of the field. 

But, also, it must not be forgotten that human 
beings are not all perfect either in a regime of 

1 Cf. J. B. Clark, Chicago Conference on Trusts, p. 405. 
106 



THE "TRUST" PROBLEM 

small or of large production. In the days of 
small partnerships things took place between com- 
petitors quite as unpardonable as those disclosed 
in high finance of to-day. When fraud or cheat- 
ing is carried on on a large scale, it is much more 
likely to be found out. Keeping these points in 
mind, it was but natural that in the wake of great 
economic movements the unscrupulous members 
of society should have been keenly alive to the 
chances of ill-gotten gain. There can be no 
doubt that the rapid and phenomenal extension 
of trusts was largely due to the sort of promoter 
who saw the chance to enrich himself by the organ- 
ization of a new industry on an over-capitalized 
basis. 

in 

Having taken a brief glance at the history, 
forms, and origin of large combinations, we may 
now profitably consider their gains before we pro- 
ceed later on to discuss their evils. 

Although the savings from large production are 
probably not to be regarded as the immediate 
cause for the creation of trusts, yet legitimate 
combinations, free from dishonesty and fraud, 
have unmistakable means of reducing the ex- 

107 



INDUSTRIAL AMERICA 

penses of conducting the processes of production 
and sale. The various items in which savings 
can be made, and in regard to which large oper- 
ations offer advantages, may be briefly enumer- 
ated as follows: 

i. It was a common experience, in former 
days, to find a number of salesmen at the same 
hotel in a rural community all occupied in selling 
the same goods for separate companies. Also, 
when each of ten establishments was trying to 
cover the whole country with its advertising, it 
became evident that one united organization 
could accomplish the same result with one-tenth 
of the expense. Moreover, if there was formerly 
competition in selling special new brands in order 
to gain trade, a combination need retain only the 
best and most salable brands. As a consequence, 
much of the old selling expense becomes un- 
necessary. Under such economics, the Distilling 
Company dispensed with 300 travelling salesmen 
at a saving of $1,000,000. The American Steel 
and Wire Company retained only 15 or 20 out of 
nearly 300 travelling men. 1 

2. Wasteful methods of conveying goods from 
factory to consumer through jobbers can be elimi- 

1 Montague, Trusts of To-day, pp. 48, 49. 
108 



THE "TRUST" PROBLEM 

nated; although in some of these new methods 
there is often to be found chances for the unscru- 
pulous to take advantage of the weak. By offer- 
ing an additional discount to dealers who will not 
handle the goods of any other producer the com- 
bination may successfully obtain control of the 
wholesale trade. Sometimes secret rebates are 
given to jobbers, in connection with fixing the 
retail price at which the article is to be sold. In 
this way the combination shares in the middle- 
man's profit; and at the same time the jobber is 
protected from the great losses of fierce compe- 
tition formerly wasted in keeping his trade. Such 
methods have saved the distillers about $40,000,- 
000, and are now in vogue in the sugar, tobacco, 
glass, and many other trades. 

3. A central organization can deal firmly with 
unfair claims for shortage in goods shipped, since 
one firm cannot be worked off against another. 
Long credits and dilatory payments can for the 
same reason be prevented. It was testified that 
the United States Rubber Company, on a busi- 
ness of $28,000,000 in 1890, had reduced losses 
by bad debts to $1,000 as compared with $100,000 
under the regime of separate companies. 

4. Under the old system each of many sepa- 

109 



INDUSTRIAL AMERICA 

rate companies had to maintain stores and offices 
in all the leading cities, and to cany a complete 
variety of all possible kinds of stock. Under 
combination all these stores but one could be 
abandoned, and only those varieties kept which 
were salable. Thus the reserve stocks carried 
could be cut down one-half, with a reduction of 
expenses in interest, insurance, storage, and the 
like. One organization was able to reduce its 
storehouses from fifteen to five. 

5. Formerly loans to carry separate establish- 
ments were obtained from local banks; now the 
borrowing is done by the combination in central 
money markets, chiefly in New York. Note- 
brokers, also, distribute loans in small fractions 
among the more remote banks. The position of 
the management, the names of prominent direc- 
tors, the close relationship to banks and trust 
companies, the formation of groups of financial 
institutions having certain promotions under their 
wing, have enabled the combinations to obtain 
loans at a greater advantage than ever before. 
That there have been errors and exposures of the 
" grafters" in high finance does not remove the fact 
of the transfer of the borrowing to central finan- 
cial markets. Favored trusts can depend upon 

no 



THE " TRUST" PROBLEM 

obtaining resources for the most gigantic opera- 
tions reaching into hundreds of millions of dollars. 

6. The advantages of buying supplies and raw- 
materials on a large scale are too obvious to need 
emphasis here. The most conspicuous illustra- 
tion is to be found in the purchase by the steel 
trust, not only of the Connellsville coke fields, 
but also of the beds of Bessemer ore on the 
shores of Lake Superior, of the chain of 112 
special lake steamers, and of the railway from 
Lake Erie to Pittsburg. In fact, the position 
of the large buyer is so powerful in obtaining a 
monopoly of the supply, or in securing discrimi- 
nations over small buyers by getting cars, or 
speedy delivery, that dangers to society of a very 
serious kind are likely to arise from this unmis- 
takable advantage. 

7. Moreover, the strategic distribution of the 
mills according to the location of the markets has 
enabled the trust to save large sums in cross- 
freights. Instead of sending steel from Chicago 
to New England, and from Pittsburg to Illinois, 
orders are filled from the plants nearest the 
buyer. By such methods the American Steel and 
Wire Co. saved $500,000 a year. With heavy 
products, like salt, the freight, before the exist- 

iii 



INDUSTRIAL AMERICA 

ence of the trust, often exceeded the value of the 
article at the point of shipment. 

8. Only in a large combination can separate 
mills be devoted to producing articles of more 
than one variety, size, or shape. In many kinds 
of manufacture, there is a demand for many sizes 
of the same thing; and to fill an order for all these 
sizes in one mill would cause great waste of time 
and efficiency in changing rolls and readjusting 
the machinery. In short, a specialization, or 
division of labor according to establishments, 
came into use. 1 In such ways the American 
Steel Hoop Co. disclosed an extra profit of one 
dollar a ton on its products. In this connection 
it is to be noted that central manufacturing and 
distributing points can be so selected as to reduce 
the cost of land, fuel, taxes, and other require- 

1 Professor H. C. Adams (Chicago Conference on Trusts, 
p. 37) holds that, in order to get the maximum efficiency in pro- 
duction, there is a limit to the size of the organization: beyond a 
certain size there is no gain by division of labor and by the efficiency 
of machinery. This point applies, however, only to the gains 
from machinery, while the other gains, as explained above, are 
not restricted by this attainment of normal size. Also, it may 
be questioned whether it is safe to say that invention and progress 
in any manufacturing industry have reached a point where one 
can reason about their stationary state. What may be a possible 
limit of size with existing methods to-day may disappear with the 
brilliant discovery of to-morrow. 

112 



THE "TRUST" PROBLEM 



merits. Consequently, greater concentration of 
invention and skill can be directed upon separate 
processes, resulting in greater efficiency by super- 
intendents and workmen. It is then possible to 
offer premiums to heads of departments, in addi- 
tion to salaries, for gains in quality or quantity 
of product. In the Standard Oil works, experi- 
mentation by experts has led to the utilization of 
the residuum in several hundred by-products. In 
Birmingham, Ala., the by-products from the coal 
nearly pay the cost of the coke. 

9. It was obvious that under diverse manage- 
ment some plants would be better suited than 
others for certain products. When combined and 
compared, it was natural to select the best equipped 
plants and to keep them in continuous operation, 
using the inferior ones only under a press of 
orders. In the Sugar trust this method resulted 
in a saving of one-eighth of a cent a pound. By 
running part of its mills all the time, instead of 
all its mills part of the time, the Rubber trust 
saves four to eight per cent in its expenses of pro- 
duction. 

10. The exceptional position of the trust as 
the producer of the largest part of the supply 
demanded by the market obviously gives it many 

"3 



INDUSTRIAL AMERICA 

advantages in influencing the price. Whether it 
is, in fact, a monopoly or not, it is enabled to secure 
a steadier course of prices than could have been 
possible in the days of divided production. When 
demand is active, it can be spread over a longer 
period by not advancing prices to the point of 
checking industrial operations; and when depres- 
sion comes, the ruinous throwing of goods on the 
market in order to keep inferior plants in oper- 
ation can be prevented. 

IV 

In passing on to discuss the influence of trusts 
upon the labor force employed, it is not necessary 
to ascribe to trusts the effects due to human nature 
in general. Unjustifiable acts by employers were 
as common in the days of small companies as now. 
And yet the size and extent of a trust gives it a new 
relationship to labor which cannot be overlooked. 

To the extent that large combinations have 
stimulated the use of labor-saving machinery, 
they have not originated, but hastened, a process 
that has been at work for a century or more. 
Nevertheless, the pursuit of economical methods 
and a reduction of cost has been pursued of late 
more relentlessly than ever before. One result 

114 



THE "TRUST" PROBLEM 

of the substitution of wonderful machinery has 
been to allow a lower class of intelligence among 
those who now tend the machines, so that the 
number of those who receive high wages for ex- 
ceptional skill bears a smaller proportion to the 
whole labor force than formerly. There is a 
tendency to an increase in the class of those hav- 
ing only a modicum of skill, and who receive only 
moderate wages. Consequently, when there comes 
a struggle over the "open shop," or a strike, in 
such establishments it is easier for the trust to fill 
the places of its workers. 

In the trust plants, not only is there a replace- 
ment of old by new machinery on a large scale, 
and often very suddenly, but it is well known 
that some mills, where laborers have established 
themselves in homes, have been dismantled. 
When thus thrown out of employment the inevi- 
table distress cannot be blinked. And yet this 
unhappy result must be assigned to the progress 
of society — which is impersonal and no respecter 
of age or class — rather than to the size of indus- 
trial plants. It has caused a readjustment of the 
number of salesmen and officials, as well as of 
laborers; but it may well be believed that the 
increasing production of the country very soon 

ii5 



INDUSTRIAL AMERICA 

will absorb all those who were formerly employed, 
and make a demand for many more in years to 
come. 

In bargaining with labor unions, however, the 
trusts occupy at present a coigne of vantage. In 
meeting a demand for the " closed shop," the 
combinations possess a greater power of endur- 
ance than the unions in a prolonged contest, 
because of their control of large funds, of the 
ability to establish and organize employment 
bureaus with connections in many parts of the 
country, of skill in using secret agents to acquire 
information as to the resources and internal dis- 
sensions of the unions, and of the power to trans- 
fer the work, in a great chain of mills, from one 
part of the country to another. 

The large combinations, in effect, are usually 
the expression of more efficient industrial organ- 
ization. Better organization by employers has 
obviously an advantage over a poorer organiza- 
tion of laborers. The very size of the " trusts" 
creates a demand for the ablest managers in the 
land. This advantage on the part of the large 
companies can be offset, in part, at least, by better 
organization on the part of the laborers — and 
above all by bringing to the front the wiser, abler, 

116 



THE "TRUST" PROBLEM 

and more intelligent labor leaders. Organiza- 
tion is power; and, so long as men are imperfect, 
power is likely to be abused at times, on both 
sides. It is claimed by the unions that the em- 
ployment bureaus of the trusts lead to the crea- 
tion of "blacklists"; and that the superior effec- 
tiveness of organization among employers enables 
the "blacklist" to be used with deadly effect. 

Again, the prejudices, the political leanings of 
employers, and the belief of some managers that 
the defeat of one political party may reduce their 
tariff assistance, or lead to hostile legislation 
against their business or markets, have no doubt 
caused in many instances a pressure to be put 
upon the employes to vote according to the 
wishes of the employers. Wherever this abuse 
of power exists, it certainly is more difficult to 
withstand, if it is backed up by the force of a 
great trust. 

On the other hand, according to the actual ex- 
perience of the past few years, and according to 
the reports of many labor leaders, the relations 
between the trusts and the labor unions have 
been remarkably friendly. When employers were 
separate the unions did not receive uniform treat- 
ment from all, and one recalcitrant employer 

117 



INDUSTRIAL AMERICA 

might prevent the acceptance of the union de- 
mands by the others who would be placed at a 
disadvantage if he stood out; while under the 
unified management of a trust the unions may 
obtain concessions which will be enforced in all 
the plants of that industry. For these reasons, 
or for others, such as the cleverness of trusts 
in managing union leaders in various ways, the 
unions have not had many struggles with the 
large combinations. In this result the profit- 
sharing schemes can hardly have had much in- 
fluence. They help; but they are insignificant, as 
a rule. 



Apart from the disposal of a supply in excess of 
the needs in the home market by some temporary 
devices for selling at very low prices in foreign 
markets (called "dumping"), the effects of trusts 
upon our international trade are likely to be per- 
manent and far-reaching. The combinations of 
capital are likely to justify themselves by results 
in their dealings abroad more than in their deal- 
ings at home — however the latter may be re- 
garded. In foreign competition all artificial ele- 
ments of production are mercilessly eliminated, 

118 



THE " TRUST" PROBLEM 

and to hold our own the gains of combinations 
must be real and permanent. Provided the evils 
can be curbed, the advantages of the trusts will 
win us benefits. "It means the survival of the 
most productive forms of business . . . and this 
power of superior service is soon to have a new 
and unique field in which to display itself. We 
are entering on an era of world-wide industrial 
connection. Asia and Africa are incorporating 
themselves into the economic organism of which 
Europe and America are the centre. There is 
coming a neck-and-neck contest between Euro- * 
pean countries and the United States for lucrative 
connections with the outlying regions. There is 
also coming a later and grander contest between 
both America and Europe on the one hand, and 
Asia and Africa on the other, for the command 
of the traffic of the world. In this contest victory 
. . . means positive wealth, high wages, and in- 
tellectual gains that cannot be enjoyed by those 
who develop less power. 

"In the momentous struggle that is before us, 
and that will yield to the successful the greatest 
of mundane prizes, I want my country to come 
uppermost. To that end I wish it to have every 
advantage that it can have in the way of produc- 

119 



INDUSTRIAL AMERICA 

tive power. I wish it to be able to meet the fierc- 
est competition, not by accepting low pay for its 
labor, but by creating the largest possible prod- 
uct. Do you suppose that is possible if it reverts 
to the plan of multiplying little shops, with the 
wastes that this system entails? Mechanical in- 
vention on the one hand, and organization on 
the other, can save us in the sharpest economic 
contests.' ' 1 

VI 

Whatever the gains of trusts may be, to many 
minds their evils seem to be dominant and menac- 
ing to society. In order to obtain the greatest 
gains, the evident intent of the large combina- 
tions is so to monopolize the supply as to control 
the price. It is this danger of monopoly which 
is most alarming to a competitive regime. Al- 
though, in actual practice, they do not always 
succeed in entirely controlling the markets, it is 
believed that the trusts obtain what may be des- 
ignated as a practical monopoly. The very big- 
ness of the combination makes competition by an 
equal amount of capital very rare and difficult. 
And yet, a glance backward discloses the unmis- 

1 J. B. Clark, Chicago Conference on Trusts, pp. 405-6. 
I20 



THE "TRUST" PROBLEM 

takable fact that no monopoly has ever succeeded 
in establishing an absolute control over the situ- 
ation. Perhaps an absolute monopoly is not 
necessary for an effective influence over price, so 
far as any practical results are concerned. 

It is, however, a matter of discussion to-day 
whether prices have even been raised by the 
trusts above the level of the former conditions. 
Although window-glass has been raised sixty per 
cent, the prices of petroleum have fallen, while 
those of whiskey, sugar, tin-plate, sheet-iron, wire, 
pepper and salt, have not been lowered to any 
serious extent. And yet the trusts have been en- 
joying the results of a remarkable increase in the 
efficiency of new machinery and improved pro- 
cesses, so that even if prices have not been ad- 
vanced, or even if they have been lowered, they 
have been able to intercept for themselves a part 
of the larger margin between outlay and selling 
price due to cheapened methods of production. 
Thus not all of the progress of society has passed 
on to the consumer. 

There is a practical limit, it is to be observed, 
beyond which the price cannot, in general, be 
raised whether the expenses of production are on a 
high or a low level. Within this limit the trusts 

121 



INDUSTRIAL AMERICA 

have an advantage over small producers, as al- 
ready shown; but they can maintain such a su- 
premacy for a length of time only through the pos- 
session of some unmistakable advantage in respect 
to quality or cheapness of product. If they are 
not eternally vigilant, if they do not keep up with 
the inventions of the day, or if their management 
deteriorates from a sense of security, rivals will be 
quick and clever in cutting into the monopolized 
field. If too high a price is maintained, substi- 
tutes find a market. During the high prices of 
anthracite coal, bituminous was extensively used. 
In short, the combination, no matter how 
large, has learned to keep the price as high as 
possible above its cheapened expenses of pro- 
duction, but not so high as to allow the rival 
producer to enter the market. That is, actual, 
or potential, competition — especially in so large 
a country as the United States with such varied 
resources — is always present to hold prices in 
check. 

Obviously, demand, as well as supply, has an 
influence upon price; and trusts do not control the 
demand. Indeed, many of the trusts are obliged 
to study demand; they try to stimulate it by lower 
prices, new brands, or improved qualities of goods. 

122 






THE "TRUST" PROBLEM 

For this purpose enormous sums are spent in ad- 
vertising. The monopoly, moreover, in order to 
hold its own, must buy up new fields, or new 
sources of raw materials, whenever discovered; 
and, in consequence, it must set to work to find a 
market for the enlarged supply of the finished 
article. In the struggle for supremacy, also, it is 
often obliged to buy up, and absorb, concerns that 
have engaged in ruinous warfare for the very pur- 
pose of making so much disturbance that they 
will be taken into the trust at a high valuation. 
In the end, the consumer must pay the cost of 
this "blackmail." 

In the effort to control the market, there is a 
constant struggle with rivals. Competition will 
never down, so long as capital is rapidly in- 
creasing, and so long as men are avaricious and 
daring. In holding their own, trusts have un- 
hesitatingly lowered prices in order to crush out 
smaller rivals, and then again raised prices. This 
practice has come down from the days of small 
producers; and when adopted by great trusts is 
more noticed. So far as the disappearance of 
small rivals is due to productive inferiority, the 
general public in its capacity as consumers can 
certainly have no sympathy with the producer 

123 



INDUSTRIAL AMERICA 

who cries out because he cannot hold his own in 
cheapness and quality. 

It is a different matter altogether if the rival has 
equal advantages in production and skill with the 
trust, but is driven from the market by discrimi- 
nations in railway rates, or by any form of special 
privileges in favor of the trusts. Here is a prac- 
tical difficulty which cannot be easily disposed 
of. The large shippers, or those who have the 
greatest traffic to offer, have long been able to force 
railways, and legislatures, to do their bidding. 
The right of all, large and small, to equal treat- 
ment has frequently been denied; and the remedy 
is not yet with us. 

Of the charge that the great combinations have 
manipulated and own State legislatures, there is 
undoubtedly much to be said in support. When 
on some occasions legislatures containing a major- 
ity of venal members introduce bills intended to 
" strike' ' certain rich corporations, the morality of 
the age does not hesitate to pay the price of im- 
munity, instead of fighting for political purity. 
Doubtless, the willingness of corporate interests to 
join hands with astute and unprincipled politicians 
to furnish large campaign funds, in return for 
legislative protection, is one of the greatest evils of 

124 



THE "TRUST" PROBLEM 

the day; and yet candor obliges us to say that this 
practice was resorted to by small producers and 
venal legislators long before the trust came into 
existence. It is the bigness of the trust that brings 
the immorality more clearly before the conscience 
of the community. The trust, if engaged in such 
operations, reflects only the morals of the day. 

To the extent that large organizations come un- 
der a single management, it has been claimed that 
the disappearance of independent producers brings 
a loss of moral fibre to the community. When 
many small producers act under a responsibility 
for their own actions in industries, it is believed 
that there will be more vigor and vitality to the 
moral sense among the public at large. On the 
other hand, it is urged that many employments 
must always be filled with small producers; that 
small operations make rigid and narrow minds; 
that the large trusts offer greater prizes to men 
of worth, honesty, and skill than were ever known 
before; and that promotion for young men of 
ability to-day depends more than ever before 
upon merit ascertained by actual experience than 
upon the accidental chance of birth, position, or 
luck. 

In the days when large enterprises are new, and 

I2 5 



INDUSTRIAL AMERICA 

when the application of great capital to industries 
involves unmistakable risks, it goes without saying 
that profits will be large; but it is quite possible 
that, in due course, when time and experience 
have made the conduct of such operations familiar, 
and when industries on a large scale have become 
shaken down into normal conditions, large profits 
will disappear before the fierce competition of the 
most capable managers; and we may then expect 
that the gains of invention, of special machinery, 
and of large production will pass on to the con- 
sumer in the lowered prices of the goods. 

vn 

In their relations to the financial public and to 
investors the trusts have assumed great prominence 
at home and abroad in connection with the activity 
of promoters and over-capitalization. Whatever 
the fundamental basis for large combinations, the 
formation of these concerns was undoubtedly 
pushed on with exceptional speed and zeal by the 
promoters, who expected large personal gains 
thereby. In some cases, however, the competi- 
tion between separate establishments was so fierce 
that an outside promotion was called in of neces- 
sity. The distrust of each other was such that 

126 



THE "TRUST" PROBLEM 

the prices paid for separate plants was kept secret. 
The usual process of recent promotions includes 
the following steps: (i) the creation of a new cor- 
poration, usually as "a holding company"; (2) the 
support of underwriters who could provide cash; 
(3) the acquirement of options upon the plants by 
the promoter; (4) the purchase of the plants either 
outright, or by obtaining the majority of the stock; 
(5) the final marketing of the securities of the 
central company on the stock market, and the 
manipulation of the price of the securities. 

Wildly sensational and dishonest as were some 
of the schemes, there yet was, underneath all the 
promotions which finally weathered a few years of 
legitimate business, a certain substructure of eco- 
nomic value which was often overlooked. The 
sudden rush of promoters to industrials was only 
an application to less certain businesses of a prin- 
ciple of valuation which had long existed in organ- 
izations of a well-settled character. The price of 
a railway or municipal bond has long been fixed 
by the public estimate of the dividend, taken in 
connection with the certainty of payment now and 
in the future; in other words, the quantity and 
value of the securities floated depended upon the 
certainty and amount of the earnings. Taking 

127 



INDUSTRIAL AMERICA 

the precedent from sound companies, which had 
passed through their uncertain stage and had 
settled down into a conservative existence, the 
promoters proceeded to apply the method of 
valuation based upon earnings to concerns whose 
financial affairs had been little known and whose 
earnings fluctuated of necessity with the ups and 
downs of a country's prosperity. 

At the best, there would be difficulty in arriving 
at the value of a separate plant. Of course the 
truth about the earnings was of first importance; 
and false statements about these in a prospectus 
gave the unscrupulous promoter a great opportu- 
nity to fleece the public. And, in the United 
States, where the State does not try to protect the 
investor in private callings, all purchasers of these 
securities had to look out for themselves. In es- 
timating the value of a plant, of course it is not 
enough to ascertain the mere cost of reproducing 
its material form. The earning capacity of an 
establishment depends upon more things than the 
amount of capital sunk in its visible property. 
The largest part of the success being due to the 
leadership and skill of the manager, a very large 
part of the earnings must be attributed to wages 
of management. Such management can embody 

128 



THE "TRUST" PROBLEM 

in permanent form in an established house a repu- 
tation for honesty, long experience with classes of 
customers at home and abroad, the wisest system 
of credits, the best method of reaching buyers by 
trade-marks and advertising, a knowledge of the 
fluctuations in price of given articles and their 
causes, the established reputation of certain brands 
of goods, the gradual possession after many years 
of technical experience in the processes of pro- 
duction, the knack of deciding which of many 
inventions offered will be a commercial success, 
and the ability to gather together a group of ar- 
tisans and inventors who may possibly carry the 
day in a time of close competition. For a suc- 
cessful organization, which yields large profits, a 
proper price must be paid when the establishment 
is sold; and the promotion discloses, with some 
surprises, to the general public the large capitalized 
securities that can be floated on actual earnings 
of which no knowledge had been formerly made 
public. 

For such legitimate sources of earnings there is 
a legitimate amount of stocks and bonds which 
can be issued. Even if untrustworthy under- 
writers issue false statements of earnings and 
enormously over-capitalize the concern, the face 

129 



INDUSTRIAL AMERICA 

valuation is quickly reduced to actual value by 
the merciless trading in the stock market. In 
that way, after a short interval, the "water" is 
inevitably squeezed out of the capitalization. 
Therefore, over-capitalization is a short-lived 
matter for all companies whose securities have been 
listed for some time. Obviously, there are well- 
managed and badly managed trusts; some whose 
earnings are based on permanent, and some on 
transient, sources of income; some depend on 
natural advantages and rich resources, some on 
franchises or on special favors. Between the 
good and the bad investment the buyer of securi- 
ties must choose only with his eyes open. 

The furor for promotions which began about 
1897 ended with the reaction in 1903. In three 
years there was a decline of no less than $1,000,- 
000,000 in the market values of the securities of 
this sort; but the losses were borne mainly by the 
underwriting syndicates and banking institutions, 
which had been unable to unload upon the in- 
vesting public. 

The fact that trust securities depend upon earn- 
ings; that the earnings of these companies by their 
very nature must fluctuate widely with the inevi- 
table ups and downs of industry and trade; and 

r 3° 



THE "TRUST" PROBLEM 

that a change of one point in a dividend on secu- 
rities causes a very great change in their selling 
price, is likely to create a very serious condition 
of affairs in times of commercial panics. To the 
extent that these industrial securities — issued to 
vast sums — are employed as collateral by bor- 
rowers to secure loans, it follows that a sudden 
emergency in trade would result in a prodigious 
shrinkage in the market value of these billions of 
securities through a relatively small reduction in 
earnings. It requires no penetration to see that 
the panic of the future may be greatly intensified 
by the unexpected and colossal changes in the 
market value of these new securities, if held by 
the banks of the country. It is no answer to say 
these securities are in strong hands: the collapse 
of 1902-3, and the inability of even the Morgan 
interests to support the securities of their promo- 
tions, are known to all. 1 

1 The possible remedy for such dangers, of course, lies in the 
accumulation of a large surplus from earnings in years of pros- 
perity, so that a continuance of the regular dividends may be ob- 
tained during years of depression. Such measures would un- 
doubtedly insure the stability of the investments; but so far such 
management has been rare, and calls for an insight and conserv- 
atism not now common. 

It is also urged that the "community of interests" now existing 
among the greatest financiers is sufficient to fix and maintain the 

I 3 1 



INDUSTRIAL AMERICA 
vm 

In turning from a study of the gains and evils 
of large combinations to the practical means of 
controlling their activities within bounds which 
will allow equal rights to all and no discrimina- 
tion to favored establishments, it goes without 
saying that differences of opinion as to the 
effects of trusts will be followed by many differ- 
ent suggestions as to the remedies for existing 
evils. 

Sometimes it has been declared that, since the 
tariff system was "the mother of all trusts," the 
abolition of duties on goods whose supply has 
been monopolized by large organizations would 
effectively abolish acknowledged evils. Although 
large and rich companies are more likely to obtain 
tariff favors, and although the protectionist system 
is more truly the "mother of graft," it is to be 
remembered that combinations have arisen in 
England under a free- trade system. Moreover, 
there are large trusts in the United States in 
industries whose products are not protected by the 

prices of securities quite independent of their actual merits. It 
is possible, of course, that such manipulation may be effective 
for limited periods, but it is hardly credible that it can be opera- 
tive over many securities in long periods of time. 

132 



THE "TRUST" PROBLEM 

tariff. In fact, the existence of trusts cannot 
be directly traceable to the tariff system. Within 
a protected country a given industry is open to 
any one having the capital and desire to enter it; 
domestic competition can be as keen in a pro- 
tected as in a non-protected industry; and, con- 
sequently, fierce rivalry can lead to combination 
as well in industries protected by duties as in any 
others. Yet, although trusts would have arisen 
without a tariff system, there can be no question 
as to the tendency of the excessive investments in 
an industry to breed trusts, and as to the assistance 
rendered by import duties to the monopolistic 
efforts of trusts to control the supply and main- 
tain the price on a level higher than it would be 
under foreign competition. The only real restraint 
upon excessive prices and excessive profits by a 
trust is the actual or potential competition of 
independent producers. In practice, it is made 
very difficult for potential competition to have 
any real effect; and, therefore, the abolition of 
protective duties on goods made by trusts is the 
one powerful means lying in the hands of the 
public by which effective competition may be 
secured, and a monopoly of the supply prevented 
from injuring the public. Any attempts to con- 

*33 



INDUSTRIAL AMERICA 

trol the world's supply by an international trust 
would, as in the well-known case of M. Secretan 
and the copper monopoly, have to meet such 
enormous difficulties as to afford a fairly safe pro- 
tection from absolute monopoly. 1 

In order to do justice to all, the State should see 
to it that all — rich or poor, large or small — should 
be given equal treatments and equal rights. No 
one should be given special privileges; and no 
discriminations should be made against any one. 
Large combinations should have the right to ex- 
istence only if their gains can be retained without 
injury to others. Mere bigness is no crime, pro- 
vided the evils of monopoly can be avoided. To 
this end, trusts should be given no legislative 
favors by Congress, or by any one of the several 
States, no special charters, nor any discriminating 
rates by railways. The problem of regulation is 
to permit large companies, but to prevent, if pos- 
sible, monopoly. Consequently, it may be nec- 
essary to make it a criminal offence for a trust 
to charge different prices to different buyers. If 
this were done, it would be practically impossible 
for a trust to crush out rivals by low prices in one 

1 The internal-tax system, as in the case of whiskey, may lead 
to excessive investments and the formation of trusts. 

J 34 



THE "TRUST" PROBLEM 

part of the country while recouping itself by high 
prices in another. 

Some States, as New Jersey, Delaware, and 
West Virginia, have gone so far in offering liberal 
charters to trusts that — by the right of a company 
created in one State to do business in any other 
State — a very disturbing lack of uniformity exists 
in regard to the control of trust-activity throughout 
our Union. Therefore, when searching about for 
remedies for this great new force in industry, it 
has been suggested that those companies which 
engage in interstate commerce thereby enable 
the central government to require a national 
charter and obedience to national regulations 
such as have been exercised over railways. The 
national Bureau of Corporations has already 
proposed a bill to Congress to enforce this point 
of view. 

The unmistakable advantage enjoyed by large 
shippers in getting preferential rates from the rail- 
ways is really as great a danger as the advantage 
of large wealth in obtaining special favors from 
legislative bodies. It is too often true that privi- 
leges are secured simply because the request 
comes from a powerful organization. The bri- 
bery, lobbying, political scheming, the election of 

135 



INDUSTRIAL AMERICA 

United States Senators, and the indirect purchas- 
ing of votes is the phase of the trust problem 
which most excites the wrath of the public. It is 
now a question with us whether existing laws 
against discriminations are sufficient to control 
the evil. 

The publicity of accounts of the large organiza- 
tions has been regarded as a basis of all reforms; 
and yet the evident desire to mislead may cause 
fraudulent entries in the accounts. Frequent in- 
spection, as in the case of banks, therefore, would 
be necessary. To carry out such a policy, how- 
ever, would require a change in the attitude of the 
courts. So long as the various corporations, when 
of small size, were regarded as private callings, 
one concern could refuse to sell to one buyer and 
yet sell to another, to sell at one price to one and 
at a higher price to another — in all ways to be 
given the rights of a private person. It is not so 
with public callings. Railways, for instance, are 
required to treat all alike. The question is, should 
combinations of capital engaged in ordinary pro- 
duction and trade be treated as public callings, 
and subjected to control over its acts by the State? 
If so, shall all corporations be so regarded, and 
where shall the line be drawn between public and 

136 



THE "TRUST" PROBLEM 

private callings? Can the line be drawn merely 
according to size? Since about 1890 the tendency 
has been to allow the corporation to do anything 
permitted to a private calling, not to regard the 
creditors of a corporation as any more the wards 
of the State than the creditors of a private person, 
and hence not to assume that the State should 
guarantee the solvency of the company, or to 
protect the investors — except, possibly, by such 
general safeguards as publicity of accounts. 

To create State monopolies as a remedy for the 
evils of trusts would have the unsatisfactory re- 
sult of deadening the progress of improvements 
in industry and inducing political corruption. 
The invigoration of methods and management 
due to private initiative is too important and 
necessary to lose. It is requisite to the life of 
competition. 

Large combinations have come to stay; and 
their existence must, and will, be made conso- 
nant with the maintenance of competition. The 
Socialists, who regard the development of great 
trusts with serenity because it seems to be a step 
toward the assumption of control over industry 
by the State, are much mistaken. The growth of 
large trusts is the result of free competition be- 

137 



INDUSTRIAL AMERICA 

tween the most powerful and efficient managers of 
production. The outcome of free play has been 
the gains of large production. The exceeding 
great attention given to the subject in these days 
is mainly due to the questioning whether some evo- 
lutions of society have developed acts which injure 
other parts of the community. Accordingly, society 
is setting itself to work to retain all the essential 
advantages of large operations, and yet to protect 
the rights of individuals. There is no reason yet 
to believe that this task, any more than others in 
the past, is beyond the powers of the American 
people, with its Anglo-Saxon traditions. It is 
the evident purpose of our public to preserve the 
essential virtues of the competitive system; to 
allow bigness, but to prevent evils; to allow large 
combinations, but to prevent monopoly; to allow 
managerial power full sway, but to prevent its 
injury to the rights of private individuals. In- 
stead of a tendency to Socialism and the aboli- 
tion of competition, the trend is exactly in the op- 
posite direction — toward a vigorous assertion of 
the enjoyment of free and equal competition. In 
brief, large combinations have disclosed a new form 
of industrial power which has its gains as well as its 
dangers; and the United States undoubtedly be- 

138 



THE " TRUST" PROBLEM 

lieves that it is strong enough to permit this new 
power to work itself out legitimately, but under 
constant restraint and oversight for the protection 
of all the rights, liberties, and opportunities of the 
weak. 



139 



THE RAILWAY PROBLEM IN THE UNITED 
STATES 

IN 1904 the total railway mileage of the world 
was 537,105, and that of the United States 
was 212,243, or nearly the total mileage of all 
other countries combined. It is, also, the most 
conspicuous example in existence of private owner- 
ship of transportation lines; the system of Great 
Britain and that of France under quasi private 
management are operated on a smaller scale. 
The government ownership of Germany and 
other European states, and that of Australia, 
which is an extreme case, stand out in bold 
contrast to the private ownership of the Ameri- 
can system. The lessons to be had from our 
experience — more or less modified, of course, by 
origins and environment — must bear directly on 
the question of private versus public initiative; 
and the peculiar conditions under which traffic 
has come to be carried more cheaply on Ameri- 
can than on foreign roads are rich in suggestions 
to men of affairs in all lands. 

140 



THE RAILWAY PROBLEM 



The development of population and production 
of goods in the United States is inextricably 
bound up with the extension of the means of 
transportation. This has had a curious reflex 
action: the railways created the settlements; and 
then the growing communities in turn developed 
the railways. To satisfy its primary necessities 
in new lands the people produced an artificial 
agent in the form of railways; but now the world 
has so built itself up, dependent upon this agent, 
that the creation is now as necessary to the life 
of its creators as the very sunshine and rain of 
nature. 

In the beginning, the dependence of its wealth 
and prestige upon railways was so well recognized 
that each State, or community, encouraged rail- 
way building by land grants, bounties, and in all 
possible ways. The future was often uncertain, 
and the risks to investors were enormous; there- 
fore, the profits to early construction had to be 
great to draw capital to new and remote districts. 
The possible increase in the value of the railway 
properties was one of the uncertain but looked- 
for elements in railway gains. So glad were 

141 



INDUSTRIAL AMERICA 

frontiersmen to obtain railway transportation, 
with its enhancement of the value of their lands, 
so small were the accumulations of local capital, 
that it never occurred to the people to suggest to 
builders that the railway properties might some 
day be placed under Government control. If 
it had been, it is needless to say that the present 
extended and complicated network of railways 
would not now be in existence. Freedom of 
competition was necessary to its existence, and 
necessary to draw forth the peculiar quality of 
daring, energy, and gigantic imagination un- 
mistakably characteristic of American railway 
builders. 

In the years after the panic of 1873 a great 
movement of population westward took place; 
and after 1886 a further movement from States 
on the northern Mississippi to the Northwest 
followed. The years 1872 and 1880-81 brought 
forth an exceptional increase in the mileage of 
new railways, which made the above migration 
possible. This construction opened new corn, 
wheat, and cattle regions, and the producer was 
given access to markets over very long dis- 
tances. The United States produced far more 
wheat than it could consume, and foreign markets 

142 



THE RAILWAY PROBLEM 

became a necessity to our farmers. To-day 
about one-third of our wheat crop and two-thirds 
of our cotton crop are exported. In order of 
development agriculture came first; and as that 
of manufactures in the great central area neces- 
sarily came later, the local markets could not 
absorb the surplus crops. It was this need of 
a foreign market for grain which lay behind the 
extraordinary decline in freight rates per ton 
mile of sixty per cent between 1872 and 1900. 
The railways solved this problem for the Western 
immigrant. 

But there were other elements in the problem. 
Russia and Argentina also had surplus wheat 
to sell to Europe. This led to the necessity of 
using only the best wheat lands in our country. 
In the United States, the low export freights on 
grain and flour enabled the best wheat lands 
of the West to drive the poor Eastern wheat 
lands out of cultivation; and there occurred a 
shifting of the wheat centre to the lands best 
suited for wheat, even though situated remotely 
from the seaboard. What was lost by throwing 
poorer land out of wheat cultivation was gained 
many times over by the country as a whole through 
the increased production of the better land; and 

143 



INDUSTRIAL AMERICA 

the total wealth of the nation was largely aug- 
mented. 1 The immediate injury to the value 
of lands by being placed in the inferior class 
should not, however, be seized upon as a reason 
for objecting to low distance rates, as employed 
in America; because to object to this process 
would be like objecting to the introduction of new 
and better machinery because the value of the old, 
poorer machinery would thereby be lowered. 

In the process of meeting foreign competition, 
the improved methods, better machinery, and 
lowered transportation charges caused a sav- 
ing of sixty-six cents per bushel between 1873 
and 1887 in the expense from the time of plant- 
ing wheat to its arrival in Liverpool ; and seventy- 
five per cent of this saving was due to reduced 
land and sea freights. Thus, although the price 
in Europe fell, the American farmer could still 
hold his own; and a price for wheat at the farm 
was maintained which enabled the settlement 
of the West to go on. The very existence of 
American agriculture depended upon the low 

1 The total value of farm lands, with buildings and improve- 
ments, in New York, Pennsylvania, and Ohio, fell over $300,000,- 
000 between 1880 and 1900; but the States west of the Mississippi 
gained enormously. See references in H. R. Meyer's, Govern- 
ment Regulation of Railway Rates, p. 218. 

144 



THE RAILWAY PROBLEM 

export freights on very long hauls; and yet the 
railways were not the losers. The extension of 
the farming area, coincident with access to mar- 
kets at low rates, enlarged enormously the home 
market for manufactures and gave the railways 
a very heavy westward-bound traffic. This out- 
come "has given the American miner and manu- 
facturer the largest and most rapidly expanding 
free-trade market in the world, and has been a 
factor in the industrial development of the United 
States no less significant than the richness of our 
mineral resources. It has been an extraordi- 
nary aid to our development as a manufactur- 
ing nation that we have been able to draw 
from Europe millions of people who have given 
us here on our own soil, and additional to the 
increase of our own population, a market for 
the products of our mines and factories. Had 
we been obliged to take the first steps toward 
becoming a great nation of manufacturers by 
finding, through export, a market for a large 
part of our manufactured products among these 
peoples in their own countries, surrounded by 
high customs barriers and other impediments, 
we should have experienced much greater diffi- 
culties in attaining our present position. The 

145 



INDUSTRIAL AMERICA 

first steps having been taken in our expanding, 
unrestricted, and familiar home market, we now 
go forward to leadership in the export of manu- 
factures to the world's markets as well." x 



What was true of wheat farming was true, 
ceteris paribus, of vegetables, Southern and Cali- 
fornia fruits, and fresh meat. The introduction 
of refrigerator cars worked a revolution in distant 
markets. The Southern or California grower of 
vegetables and fruit was enabled by low rates to 
supply the stands in New York, Chicago, and 
St. Louis. The packing-houses of Kansas City, 
Omaha, and Chicago have been able by refriger- 
ator cars to supply the market for fresh meat 
in every city and town throughout the country. 
The Eastern growers of fruit, the market-garden- 
ers of the North, and the small butchers through- 
out the country were all made to suffer by the 
new competition. But these sufferings were the 
inevitable outcome of progress; or, as it has been 
well expressed, they are "the growing-pains of 
progress." 

1 Hugo R. Meyer, op. cit., pp. 213-14. 
146 



THE RAILWAY PROBLEM 

These recrystallizations in the economic organ- 
ism were not accepted easily by those immedi- 
ately affected. They typify the kind of change 
which is constantly going on in a really live 
society due to a healthy survival of the most 
productive resources in a wide area of free com- 
petition. And these examples enable us well 
to understand the essential nature of the agita- 
tion in regard to railway rates: the problem is 
much the same in the United States as in Germany. 
It is a rivalry between competing interests in 
different parts of the country. Just as the grain 
and lumber of eastern Germany, the coal and 
iron of the Ruhr and the Saar districts, cause 
industrial conflicts and controversies over rail- 
way tariffs — so with us, the established interests 
strongly object to active competition, even though 
the nation as a whole becomes the richer. 

For years the port of New York held control 
over Western shipments for export, assisted by 
the Erie Canal from Buffalo to the Hudson 
River. Railways having termini in Philadelphia, 
Baltimore — and later at Charleston, Mobile, New 
Orleans, and Galveston — began to compete for 
this traffic from Chicago, St. Louis, and the farm- 
ing area. The warfare between rivals resulted 

147 



INDUSTRIAL AMERICA 

in fierce competition and lowered rates — and, 
because of the necessity of low rates, there came 
the introduction of economies in railway practice 
which made the lowered rates normal. Until 
forced by competition the railways never knew 
how cheaply they could carry goods. It was the 
spur of necessity that drove them to invention 
and to the introduction of improved processes. 
This progress in cheapened railway transporta- 
tion explains the practical disappearance of the 
canal as a competitor of the railways. In the 
United States the canal has been completely 
distanced by the railways; and to us the attempt, 
under much the same general conditions, to 
build additional canals in Germany, seems not to 
be justified by the progress of modern railway 
practice in carrying increasing loads at diminish- 
ing rates. 

So effective were the railways in taking away 
the traffic from the Erie Canal that local New 
York interests resorted to politics, and to all 
possible devices, to force the New York Central 
Railway to protect their trade from other ports; 
but in vain. It was urged that rates should be 
based on distance; and that established inter- 
ests should be protected in their trade. The 

148 



THE RAILWAY PROBLEM 

competition of other ports, however, carried the 
day, and New York lost its position of monopoly. 
As a consequence, New York's trading and 
shipping facilities have been, of necessity, kept at 
a point of modern efficiency. That city could 
not, under a system of protection to local inter- 
ests, let her docks and wharfs deteriorate under 
political corruption without seeing her trade 
disappear; the charges for handling, for terminal 
facilities, for lighterage, and the like, had to be 
reduced; abuses had to be rooted out; and an- 
tiquated and cumbersome methods of business 
had to be revised. In short, the railway progress 
which took away monopoly from New York not 
only enriched other ports and the rest of the 
country in many interior centres, but it actually 
brought a new vitality to New York itself. The 
outcome is a pertinent illustration of the truth 
that liberty of action, and absence of interference, 
inevitably result in energy and in advanced 
methods of business. 

The process by which railways have outstripped 
the canals is based on the same principle as that 
by which wholesale can be managed more cheap- 
ly than retail trade. A canal by its very nature 
can float only vessels of limited tonnage, from 

149 



INDUSTRIAL AMERICA 

200 tons and upward; the time required for 
reaching destination is considerable; and the 
costs of transshipment and reloading are im- 
portant in passing from railways or vessels to 
elevators, and thence to canal-boats. The limita- 
tions that are true of canals are also true of com- 
paratively small rivers, such as those of Germany. 
On the other hand, the central point in recent 
American railway improvements is a re-creation of 
track, bridges, and equipment in order to increase 
the tonnage haul. The new cars carry fifty to 
fifty-five tons, where the old held only perhaps 
twenty to thirty tons; the heavy locomotives pull 
forty to sixty cars where the old ones pulled fifteen 
or twenty; the old rails have had to be replaced 
by heavier steel rails; the bridges to be rebuilt to 
stand a heavier strain; the curves to be abolished; 
and the heavy grades to be reduced. This has 
been the burden of railway policy for several 
decades. It accounts for the enormous expen- 
diture from earnings and for new loans upon 
equipment and construction, to the end that the 
average number of tons carried in a train has, 
for the whole country, increased from 180 in 1894 
to 307 in 1904. The practical result on the best 
prepared road-beds is that train loads of 2,000 to 

150 



THE RAILWAY PROBLEM 

2,500 tons of paying freight are now carried. 
Such results are impossible on canals and small 
rivers. The saving of time, moreover, on all 
shipments in which speed is an element — e. g., 
fruit and fresh meats — gives the railways a great 
superiority over canals. Thus, low rates, orig- 
inally the result of fierce competition, have been 
made remunerative by gigantic economies. 

What is true, however, of canals and small 
rivers is not true of large rivers like the Mississippi 
and of the Great Lakes in the North. In regard 
to the Mississippi, however, it is being discovered 
that the depth of the river will not allow the 
passage of vessels of the draught necessary to carry 
loads large enough to compete with the heavy 
loads carried by the railways. Hence, the rail- 
ways on each side and parallel to the river, having 
low grades, are quite certain to distance the 
Mississippi River in the struggle for traffic. 
But wholesale transportation it is to be noted can 
be carried on on great water-ways as well as on 
railways; and recent years have seen barges and 
traffic steamers put into use upon our northern 
lakes of an unparalleled size and tonnage, carry- 
ing as much as 12,000 to 14,000 tons of ore. 
These are the improvements which have allowed 

*5 J 



INDUSTRIAL AMERICA 

Bessemer ore to be carried from Lake Superior 
so cheaply to Ohio and Pennsylvania furnaces, 
that, with other elements, America has been able 
to undersell European steel. In short, the rail- 
ways cannot, as a rule, compete in cheapness with 
deep water-ways, when open, in carrying certain 
kinds of heavy freight; yet in distances of at least 
500 miles the railways believe they can success- 
fully compete with even deep water-ways in carry- 
ing heavy traffic. 

The methods by which canals have been left 
behind in the race are much the same as those 
by which trade has been decentralized and many 
local distributing centres created in the interior 
of the country. In other words, traffic which 
can be delivered in large amounts, at regular 
times, for distant points, without breaking trains, 
can be carried at much lower rates than freight 
in small amounts (even car-load lots) at un- 
expected times, to be dropped at local points, 
causing loss of time, additional cost and service 
in switching, labor, storage, etc. Therefore, it 
is cheaper to send freight from New York through 
to Chicago and then send it east fifty miles from 
Chicago by local trains, than to send it directly 
from New York to the station fifty miles nearer 

152 



THE RAILWAY PROBLEM 

New York; unless the local station happens to 
be nearer a division point. This is a hard proposi- 
tion for many people to understand; but it is a 
plain business fact, which has been adopted of 
necessity by all railways. It is, moreover, per- 
mitted in spite of the long- and short-haul clause 
of the act of 1887, x which forbade railways to 
charge more for a short than a long haul of freight 
transported over the same line under "sub- 
stantially similar circumstances and conditions.' ' 
The present Interstate Commerce Commission is 
inclined to believe that the act should be literally 
interpreted ; while the Supreme Court has ruled 2 
that the existence of rival lines of transportation, 
or water-ways, which introduce competition for 
the traffic from shipping points, creates con- 
ditions and circumstances sufficiently dissimilar 

1 "Sec. 4. — That it shall be unlawful for any common car- 
rier ... to charge or receive any greater compensation in the 
aggregate for the transportation of passengers or of like kind of 
property under substantially similar circumstances and conditions, 
for a shorter than for a longer distance over the same line, in the 
same direction, the shorter being included within the longer dis- 
tance. . . ." 

2 United States Reports, 181, East Tennessee, Virginia & 
Georgia Railway Co. et al. vs. Interstate Commerce Commission; 
and United States Reports, 168, Interstate Commerce Commis- 
sion vs. Alabama Midland Railway Co. et al. 

153 



INDUSTRIAL AMERICA 

to warrant the charging of less rates, in some 
cases, for a long than for a short haul over the 
same line. 

The ability to carry through freight cheaply in 
large quantities, and the willingness to fix special 
rates from or to places where traffic can be built 
up, has decentralized trade in the United States. 
In New York the jobbers who took small orders 
for dry goods from country purchasers found 
that interior cities could buy directly from im- 
porters or manufacturers by the car load and get 
lower rates on shipments of that size; and thus 
jobbers established themselves in other cities, 
from which small lots of goods were in turn dis- 
tributed to nearby towns. Thus, existing railway 
policy leads to building up interior centres, or 
"basing points," as they are called. This is 
particularly true of the South. In train loads, 
or car loads, goods can be sent at lower rates to 
central distributing points, like Atlanta, than to 
small local stations much nearer in distance to 
the shipping point. As a consequence, these 
" basing points," where several railways compete, 
obtained advantages which developed their busi- 
ness as distributing centres. This is clearly shown 
in the accompanying map. Against this policy 

154 



THE RAILWAY PROBLEM 

cities and interests which have long previously 
handled this trade protest vehemently, and claim 
that established trade should be protected by 
the railways. Geographical advantage is claimed 
as a vested interest; and the competition of 
remoter regions is regarded as an intrusion to 
be fiercely fought. On the other hand, with an 
eye single to stimulating traffic and to increasing 
income — since fixed charges are much the same 
whether additional traffic is gained or not — the 
railways have acted as if their reason for exist- 
ence were the annihilation of distance and time 
in transportation. Consequently, the railways 
have enormously increased the competition be- 
tween different communities in common markets, 
and have brought out fierce struggles between 
different interests touched by cheap transporta- 
tion. In the United States distance rates — 
that is, the longer the distance the higher the 
rate — have played no serious part. Whether 
this policy be right or wrong, it has developed a 
phenomenal traffic at rates lower than in any other 
country of the world, and has built up interior 
cities in a remarkable manner. 

The places having established trade and old 
connections — often supported by the Interstate 

155 



INDUSTRIAL AMERICA 

Commerce Commission — are opposed, in general, 
to the system of "basing points." The new 
cities, on the other hand, the newly opened re- 
sources, the developing agricultural regions, are 
eager to get the rates which will give them the 
trade and access to markets. Wherever there is a 
chance to develop coal mines, or open up a rich 
district, some railway is perfectly sure — rivalries 
apart — to build connections, and offer rates which 
will start the traffic moving. Out of such a situ- 
ation arises the pivotal issue in the railway problem 
of to-day. In a very large territory, including 
a variety of climates and resources, within which 
competition has had free play, the railways have 
by rates practically abolished distance, and con- 
sequently one community is obliged to work out 
its commercial salvation under the intense rivalry 
of any other community which can enter into 
competition. The critics of the railways do not 
complain that railway rates are, in general, high 
or unreasonable; because they are lower than in 
any other country. But constant fear is expressed 
that the rates are not equal, and that other places 
have an advantage which will destroy existing 
trade. It is a survival of the fittest; and in the 
process of adjustment the friction is highly un- 

156 



THE RAILWAY PROBLEM 

comfortable. The wealth and progress of the 
whole country is unmistakably advanced, but 
on the part of those proved inferior by stress of 
competition the suffering is never regarded with 
cheerfulness. 

Yet, in spite of this struggle, the general trade 
increases. Minneapolis and St. Paul fear the 
rivalry of Duluth in shipping grain and flour; 
and yet with the growth of Duluth the twin 
cities have not failed to increase in every way. 
Chicago fears the shrinkage of grain dealings, if 
the grain west of the Mississippi goes to the Gulf 
of Mexico; and yet the general trade of Chicago 
is constantly swelling. New York bitterly op- 
posed the "differentials" assigned to the trunk 
lines tributary to Philadelphia, Baltimore, and 
other ports, but yet New York is a much better 
city in which to do business cheaply to-day than 
it ever was. Finally, great commercial centres 
have employed expert traffic men, taken from the 
railways, to help them retain their trade. The 
fear of losing business immensely improves the 
efficiency of business men. Unprotected, they 
cannot go to sleep. 

The railways tributary to certain cities and 
ports will work to the utmost to secure traffic 

157 



INDUSTRIAL AMERICA 

from areas within their reach, whether or not 
tapped by other roads and water-ways; and 
because of this competition special rates will be 
offered solely to get the traffic. As a consequence, 
the system of rate-making is not uniform, but 
highly complex. "The rival primary markets 
are at the same time rival jobbing and trading 
centres. To fall behind as a primary market 
means also to fall behind as a distributing centre; 
to gain as a distributing centre means also to gain 
as a primary market. Therefore, it is necessary 
to divide among the rival railways and the rival 
markets not only the eastbound traffic in agri- 
cultural products, but also the westbound traffic 
in merchandise and manufactures. This west- 
bound traffic may originate anywhere between 
Montreal in the North and Galveston in the 
South ... and it may be sent to its final destina- 
tion by way of any of the trading centres between 
Chicago and Duluth in the North and Galveston 
and New Orleans in the South. " * A change in 
the rates from the North Atlantic ports to Galves- 
ton would disorganize the existing movement of 
goods to the whole area west of the Mississippi 
River and east of the Rocky Mountains. 

1 H. R. Meyer, ante cit., p. 288. 
158 



THE RAILWAY PROBLEM 

A concrete case will illustrate the general com- 
plexity of rate-making, and also the existence of 
forces over which the railways have little control 
and to which they must submit. The rate on 
cotton goods from New England and New York 
to Cincinnati is forty-nine cents. Obviously, the 
new cotton-mills of the South must have as low 
a rate from Southern points to Cincinnati. If 
the Southern rate were lowered, the rate from 
New England must be altered; but if the latter 
happened, the rate from New England to every 
other primary market in the Mississippi valley 
would have to be changed. 

The rate from New England and New York to 
Chicago is fifty-five cents; therefore, the South- 
ern mills must have the same competitive rate to 
Chicago, or be shut out of that market. But, 
if the charge of forty-nine cents to Cincinnati be 
retained on goods shipped through Cincinnati 
to Chicago, only six cents is left for the haul from 
Cincinnati to Chicago. To avoid this difficulty 
the rate on goods intended for Chicago is divided, 
thirty-five cents being given for the haul from 
the South to Cincinnati, and twenty cents from 
Cincinnati to Chicago. Thus, although two differ- 
ent rates, one forty-nine and the other thirty-five 

159 



INDUSTRIAL AMERICA 

cents, are charged for the same goods over the 
same distance, in reality the Cincinnati dealer 
is not injured thereby, while a larger market is 
opened to the South in Chicago on even terms 
with Eastern mills. 

In this contest between rival districts traversed 
by various lines, there have been evolved traffic 
associations, which work to partition the trade 
of certain regions among the competing railways, 
and reduce the useless waste of competition. 
For instance, the railways of the Middle West are 
given the carriage of bread-stuffs to the South, 
while the railways of the Atlantic States are 
given the carriage of merchandise and manu- 
factures to the South. But as the Middle West 
gains in manufactures, it demands some com- 
promises by which it can also reach the South 
with other than bread-stuffs. In such ways 
commodity rates sometimes are prevented from 
going to wasteful extremes by traffic associa- 
tions. 1 

As is well known, also, special or "com- 
modity " rates, although they add to the com- 

1 Traffic associations for maintaining rates have been declared 
unlawful under the Antitrust Act. See United States vs. Trans- 
Missouri Freight Association (166 U. S. 290). 

160 



THE RAILWAY PROBLEM 

plexity of rate-making, have played a large part 
in building up American industries. These are 
public rates, open to all, but applying to special 
articles carried to special markets. Without 
special rates these goods would not be moved. 
A low rate is given, but one high enough to give 
some profit above the additional cost of moving 
this freight. As manufactures have increased in 
the South, special rates have been granted certain 
commodities bound for specific points in the 
North and West, rates lower than on the same 
goods destined for Southern markets. Thus the 
Southern railways enable Southern manufacturers 
not only to compete with Northern and Western 
manufacturers in the South, but also to invade 
the markets of the North and West. Likewise, 
California is given a rate such that her fruit can 
be sold in Chicago with the fruit of any Northern 
or Eastern State. Again, in order to meet the 
competition of sailing-vessels, the railways have 
made perhaps 1,500 commodity rates on articles 
moving between the Atlantic and Pacific Oceans. 
Although such traffic would not be moved without 
these special rates, all that they bring in over 
moving expenses is clear gain; and they may 
enable other kinds of goods to be carried more 

161 



INDUSTRIAL AMERICA 

cheaply, while both kinds of goods yield a com- 
bined revenue large enough to pay expenses and 
dividends. 

in 

The preceding exposition will enable us to get 
at the heart of the present agitation, which de- 
mands a law empowering the Interstate Commerce 
Commission — or a similar body — to fix a rate, or 
declare what is a reasonable rate. There are 
two classes of difficulties: (i) One relates to unequal 
rates between rival communities or places; and 
(2) another relates to discriminations between 
shippers in the same places. 1 We are now speak- 

1 "Sec. 2. — That if any common carrier . . . shall, directly 
or indirectly, by any special rate, rebate, drawback, or other de- 
vice, charge, demand, collect, or receive from any person or per- 
sons a greater or less compensation for any service rendered, or to 
be rendered, in the transportation of passengers or property . . . 
than it charges, demands, collects, or receives from any other 
person or persons for doing for him or them a like and contem- 
poraneous service in the transportation of a like kind of traffic 
under substantially similar circumstances and conditions, such 
common carrier shall be deemed guilty of unjust discrimination, 
which is hereby prohibited and declared to be unlawful. 

"Sec. 3. — That it shall be unlawful for any common carrier 
... to make or give any undue or unreasonable preference or ad- 
vantage to any particular person, company, firm, corporation, or 
locality, or any particular description of traffic, in any respect 
whatsoever. . . ." 

162 



THE RAILWAY PROBLEM 

ing of the first; the second will be taken up 
later. 

There is an interesting parallel between the 
effect of import duties for protective purposes 
and railway rates. It goes without saying that 
a certain community would be protected from 
the competition of others if it could obtain special 
privileges, either in the form of a customs tariff 
or in preferential railway rates. In the past, 
large interests have received rebates from the 
railways, or special favors not accorded to others, 
and have thrived mightily. Men in such indus- 
tries have had their gifts to religion and educa- 
tion questioned, because their wealth is regarded 
as "tainted." In a similar way, certain interests 
have received special protection from the com- 
petition of others making the same article, by 
customs duties or special favors — and these favors 
have aided the operations of large "trusts" — 
and great wealth has been accumulated thereby. 
If the gains due to favors from railways are 
"tainted," then all gifts due to gains from pro- 
tective tariffs are likewise "tainted." 

In fact, the familiarity with grants of special 
protection from Congress has made it easy and 
legitimate to many minds to ask for special ad- 

163 



INDUSTRIAL AMERICA 

vantages in rates from railways. In the present 
struggle of communities, cities, and States against 
each other there has arisen a desire to apply the 
protective principle to domestic trade. If the Con- 
stitution had not made this impossible, we should 
to-day see one State, in a narrow spirit of chauvin- 
ism, protecting itself from the citizens of other 
States. In fact, the State Railway Commissions 
— with some notable exceptions — are sometimes 
using the power to regulate rates within their 
limits in a protective fashion; while, as a matter 
of fact, industrial areas and systems of trans- 
portation have never been coincident with State 
lines. To carry out such State policies is to 
revert to the medievalism which placed an octroi 
on the goods coming into each village. 

Those who feel that the railways charge 
more than is reasonable have fully disproved the 
maxim ascribed to Erasmus, that "Peaceful error 
is better than boisterous truth.' ' The feeling is 
strong that one of the two interested parties to 
rate-making should not be the sole judge of what 
a reasonable charge should be; and whatever 
truth there is in this demand has been boister- 
ously proclaimed. Indeed, the contest is not so 
much au fond between shippers and the railways 

164 



THE RAILWAY PROBLEM 

as between the small and the large shippers, and 
between the less productive and the more produc- 
tive areas. Railways do not follow the flag and 
the law, but the traffic. First and foremost, they 
wish traffic: everything else is secondary. Para- 
doxical and strange as it may seem, it is literally 
true that the railways are afraid of such large 
shippers as the packing-houses; it is true that the 
large shippers have their heels on the necks of 
the railways. The "boisterous truth" we hear 
so much of to-day is not the cry of the consumer, 
or the general public, but of the smaller shipper 
— or the shipper who is in a contest with some 
rival. The competitive, but not protective, rates 
allow the consumer to obtain his goods at a low 
price in all parts of the country. Just as the 
abolition ot protective duties would stimulate po- 
tential competition and prevent the "trusts" from 
reaping exceptional gains, so competitive railway 
rates to distributing centres prevent certain estab- 
lished interests from bleeding the consumer. 

IV 

The reason why the shippers hold the upper 
hand over the railways is not far to seek. The 
railways, as has been said, primarily wish traffic, 

165 



INDUSTRIAL AMERICA 

and they have wonderfully increased the move- 
ment of traffic by special rates, and have assisted 
in developing the resources of the country. So 
far as these rates are open to all, no question — 
beyond the legitimate rivalry of localities — can 
arise. But traffic managers know perfectly well 
that they are expected "to show results"; the 
earnings must sometimes be made to accommo- 
date the stratagems of "high finance' ' in the 
centres of New York and London. The struggles 
of the financial leaders in New York for mastery, 
or for dividends sufficient to float new securities, 
are influential causes of the mad competition for 
traffic by separate systems, or roads. If a traffic 
man cannot "produce results" — no questions 
being asked as to the means — he knows that his 
official days are numbered. As a consequence, 
the great packing-houses, the breweries, and 
large shippers know well how to work one rail- 
way off against another, and finally to obtain 
secret rates, rebates in indirect repayments, and 
the like. Discriminations were not forbidden by 
law before 1887, and until recently this practice 
was almost universal; and the excuse given was 
that "everybody did it." All the same, since 
1887, it has been in direct violation of the law. 

166 



THE RAILWAY PROBLEM 

The existence of private refrigerator-car lines 
has been also regarded as a means of granting 
preferential rates to certain shippers. Also, large 
shippers have built short railway spurs, incorpo- 
rated these spurs, and on delivering to the railways 
their traffic bound for remote points, they have 
exacted a large part (perhaps twenty per cent) 
of the through rate as an apportionment between 
connecting railway lines. This, of course, is a 
form of rebate. 

The public indignation at inequality of rates 
finally forced the passage of the Elkins act of 
1903, which fixed heavy penalties of not less than 
$1,000 nor more than $20,000 for each offence 
in deviating from published and lawful rates — 
the acceptance as well as the offer of a rebate, 
or discrimination, being made a misdemeanor. 
Lately, prosecutions are being vigorously con- 
ducted against violators of the statutes by federal 
officials, supported by President Roosevelt. The 
Commission and the Department of Commerce 
have been active in bringing offenders to justice. 



Having seen the reasons for the very com- 
plicated system of rate-making now in existence, 

167 



INDUSTRIAL AMERICA 

the opposition of one set of interests against 
another, and the wide-spread indignation against 
secret rebates, we shall be better able to judge of 
the merits of various proposals now before the 
public. 

The points at issue are not always clearly 
presented by the parties to the controversy. There 
is, on the one side, a demand for additional 
legislation giving to the Interstate Commerce 
Commission, or to some transportation court, 
the power to fix and to enforce rates. On the 
other side, it is urged that such a body as the 
Commission could not possibly take up the whole 
present complex system of rates; that these rates 
can be fixed only by practical traffic men; that, 
although public-service corporations, the railways 
are private properties, and if the State fixes the 
charges, it must be responsible for the profits. 
As a fact, the Commission now (April, 1906) has 
the power to declare any rate unreasonable, but 
it has no authority to state what rate should be 
substituted for it ; nor has it the authority to com- 
pel a carrier to desist from charging a rate which 
it has declared to be unreasonable. On the side 
of the Commission there is a wish for more power; 
and on the side of the railways a disposition to 

168 



THE RAILWAY PROBLEM 

regard the Commission as the prosecutor for the 
complainants rather than as an umpire between 
the shippers and the railways. 

The Commission in the beginning had to en- 
force a new law, which had not yet been inter- 
preted by the courts. The long- and short-haul 
provision of the act was put into execution, but 
in time was emasculated by the decisions of the 
courts. Distance rates evidently influenced the 
framers of the law; and they have been often 
favored by the Commission. But the Supreme 
Court entirely disposed of the distance rates by 
permitting a rate from Liverpool to San Francisco 
through New Orleans such that the railway charge 
on the imports between New Orleans and San 
Francisco was less than on goods originating in 
New Orleans and destined to San Francisco. It 
was made clear that not all, but only unjust 
discriminations were forbidden; and that com- 
petition, even in foreign ports, served to create 
dissimilar circumstances sufficient to justify differ- 
ent rates for the same haul. In short, the main 
features of the law were more or less overruled 
by the course of events, by the increase of knowl- 
edge as to competition, and by the interpretation 
of the courts. Therefore, much of the criticism 

169 



INDUSTRIAL AMERICA 

directed against the Commission should be directed 
against the original act. But if the original act 
is now more or less obsolete, the point of view in 
harmony with it is also more or less obsolete. 

The opinion of the Supreme Court * upon the 
relative efficiency of railways and commissions 
in making rates under competitive conditions is 
well worth quoting here: 

"Subject to the two leading prohibitions that 
their charges shall not be unjust or unreasonable, 
and that they shall not unjustly discriminate so 
as to give undue preference or disadvantage to 
persons or traffic similarly circumstanced, the 
act to regulate commerce leaves common carriers, 
as they were at the common law, free to make 
special rates looking to the increase of their 
business, to classify their traffic, to adjust and 
apportion their rates so as to meet the necessities 
of commerce. . . . The carriers are better quali- 
fied to adjust such matters than any court or board 
of public administration- and, within the limita- 
tions suggested, it is safe and wise to leave to their 
traffic managers the adjusting of dissimilar circum- 
stances and conditions to their business. ..." 

1 United States Reports, 168, Interstate Commerce Commis- 
sion vs. Alabama Midland Railway Co. et al. 

170 



THE RAILWAY PROBLEM 

"When once a substantial dissimilarity of 
circumstances and conditions has been made to 
appear, the carriers are, from the nature of the 
question, better fitted to adjust their rates . . . 
than courts or commissions. . . . But it does not 
mean that the action of the carriers, in fixing and 
adjusting the rates, in such instances is not sub- 
ject to revision by the Commission and the courts, 
when it is charged that such action has resulted 
in rates unjust or unreasonable, or in unjust 
discriminations and preferences." 

It is one thing to initiate a rate schedule, and 
another thing to decide whether in particular 
instances a rate is reasonable or unreasonable. It 
would be physically and intellectually impossible 
for a commission to establish the thousands of 
schedules now in force, created by hundreds of 
experts who are governed in their decisions by 
practical business conditions; but it is quite 
possible for a judicial commission, or the courts, 
to pass judgment upon rates already established 
by the railways, to say whether they create in- 
justice or not, and to indicate what would be 
justice. Initiation is one thing; supervision is 
another thing. And well-disposed railways can 
have no objection to the latter, if carried out by 

171 



INDUSTRIAL AMERICA 

judicially minded men. At present, the issue is 
whether a rate declared to be unreasonable by the 
Commission shall or shall not be legally enforced 
upon the railways at once (or within a very short 
time). Under the existing law, the old rate, 
even if declared unreasonable, remains in force 
during the long time required to carry an appeal 
through lower courts to the Supreme Court. 

No one can fail to notice how wide-spread is the 
demand for a further regulation of rates. Where 
there is so much smoke there must be some fire. 
So long as traffic managers are human beings 
they will make mistakes, or even submit to 
pressure. 1 In the tremendous conflicts between 
rival cities and districts extreme departures have 
been made from what would be judicially regarded 
as a reasonable rate. In the evolution of the 
fittest city, the most promising region, the rail- 
ways have thought only of stimulating traffic. 
It is quite conceivable that the process by which 
the superior is placed above an inferior market 
may result in genuine hardship and injustice. It 

1 It is charged that the Commission has, in a similar way, 
been amenable to pressure (not pecuniary) in favor of preserving 
established centres of trade, in that it has not considered the 
good of the country as a whole, but only that part already in 
possession of the trade. 

172 



THE RAILWAY PROBLEM 

is quite impossible that every rate should be just 
to everybody; in fact, every rate is the outcome 
of struggle and compromise which pleases no one. 
Consequently, an intelligent supervision of rail- 
way rates by a commission of high character and 
ability might be able to render a great service in 
bringing to light unjust rates or discriminations, 
in making just complaints effective, and in pre- 
venting the strong from trampling upon the weak. 
There is no doubt whatever that large shippers 
have bullied the roads into granting special favors 
in rates, rebates, etc. In fact, the weakness of 
the railways in yielding to these large interests 
is in itself the strongest reason for the existence 
of a body with power sufficient to enforce equality 
of treatment. It is the general recognition of 
this fact — and the railways themselves are chiefly 
responsible for it — which gives such force to the 
public demand for federal regulation of railway 
rates. Instances of unfair treatment are not 
wanting; and their odor has extended to the 
general system of rates, whether good or bad. 

VI 

The immediate question at issue is whether, 
in case of a disputed rate, the one to be enforced 

173 



INDUSTRIAL AMERICA 

in the long time before final adjudication by the 
courts shall be the old rate fixed by the railway 
or a new rate fixed by the Commission. 

i. As the law now stands, the Commission 
can declare a rate to be unreasonable; but, as it 
is not empowered to inflict any penalty on a 
railway for continuing to charge the unlawful 
rate, the only recourse for the shipper, or the 
Commission, is to ask the courts to give redress. 
An appeal by the railway to final adjudication 
by the Supreme Court is possible; so that a con- 
siderable time may elapse between making com- 
plaint and its actual enforcement or disallowance. 
Under present conditions (1906), the rate fixed 
by the railways remains in force in the interim and 
is paid by the shipper, who passes it on to the 
general consumer in the price of the goods. If the 
sum at issue should be placed in escrow pending a 
decision by the courts, two different things might 
happen: (a) If the railway wins, there is no dis- 
turbance one way or the other; (b) if the railway 
loses, then the difference between the old and the 
new rate — which in the meantime has probably 
been paid by the consumer in the price of his 
goods — must be handed over to the shipper. 
Thus the shipper (such as those who sell grain, 

174 



THE RAILWAY PROBLEM 

feed, hardware, and the like) would be given a 
clear unearned bonus; since, even if the shipper 
were so inclined, it would be impossible to repay 
the unknown and scattered consumers. 1 

2. Should a bill be passed preventing an appeal 
by the railways, in case an unfair rate imposed 
by the Commission should go into force at once, 
very serious consequences might ensue. Great 
losses might be inflicted upon both communities 
and railways. But if the railways were given the 
right of appeal, and if the Commission's rate were 
put into operation immediately, the railway would 
be obliged to sue for a restoration of the old rate. 
The shipper, therefore, should be required to give 
bond for, or place in escrow, the difference between 
the rates in question. In the interim, before 
settlement of the issue, the shipper would enjoy 
the lower rate; but, until the final decision of the 

1 Prof. W. Z. Ripley (Atlantic Monthly, October, 1905), in 
his very intelligent advocacy of President Roosevelt's policy, 
says: " Why not permit the original railroad rate to continue 
in force, as at present, pending final adjudication; but require 
the carriers to give bond for prompt repayment of any surplus 
charges over those finally sanctioned by the courts. This 
would leave the business of rate-making in railway hands as now ; 
and yet afford a substantial remedy for the disputatious shipper." 
It would certainly be more than "a remedy " if the shipper received 
payment twice for part of the expenses of transportation. 

175 



INDUSTRIAL AMERICA 

courts, he would not know whether or not the 
old rate would be restored. Ordinarily, lowered 
transportation charges would result in lowered 
prices to the consumer. In this case, however, 
the shipper would not lower the price to the con- 
sumer by the difference between the old and the 
new rate, because, if the old rate were restored 
by the courts, he would be obliged to return that 
difference to the railway. Thus, in this event the 
public would secure no real benefit during the 
interim. 

It is to be remembered, however, that the 
change in a rate by the Commission would affect 
not one, but all shippers; and also, that one 
change might derange a whole system of inter- 
dependent rates in a large territory, and thus 
have a wide-reaching influence over thousands of 
rates. If such a rate were not upheld by the 
courts, and the old rate were restored, it would 
be practically impossible for the railways to 
recoup themselves for the difference by any 
system of giving bonds, or putting money in 
escrow; since the effects of any one change are 
spread in a complicated way over the whole com- 
petitive area. 



176 



THE RAILWAY PROBLEM 

vn 

The rates charged the shipper, however, seem 
to be influenced by other conditions — conditions 
connected with the rise of the revenue per ton 
mile from seventy- two cents in 1899 to seventy- 
eight cents in 1904. On the one hand, it is claimed 
that the rise of wages to employes, the increased 
prices of coal, lumber, and supplies, has so raised 
the operating expenses as to explain a justifiable 
advance in the charges to shippers. On the 
other hand, it is contended that the partial sup- 
pression of competition by the combination of 
railways into systems under one control, which 
has gone on in the same period, has been the 
reason for the increase of rates. The truth lies 
somewhere between these two views. It is a 
well-known fact that traffic has developed so 
rapidly in the last few years that the equipment 
has at times not been sufficient to move all the 
traffic offered. In such circumstances the rates 
could be raised somewhat without reducing the 
traffic, while in lean years, of fierce competition, 
that would be impossible. The business of rail- 
ways is one of increasing returns; that is, given 
the outlay and traffic, enterprise is devoted to 

177 



INDUSTRIAL AMERICA 

finding new traffic which can be moved by special 
rates, or to encouraging new industries, or to 
opening up new inlets of traffic to the line. In 
this way the returns might be gaining on expenses ; 
and, when rates are raised in order to cover in- 
creasing expenses, it is not wholly accurate to say 
this could not be done unless combinations to 
control rates existed. It is quite likely that, if 
there had been no combinations, and if former 
competition had continued, the prosperity since 
1898 would have permitted higher rates and led 
to higher dividends. 

Another consideration must be kept in mind. 
The rise in the average revenue charge per ton 
mile for the whole country may be influenced 
by changes in the kind of goods hauled. Should 
the traffic in more valuable goods be increasing, 
or should the traffic on which higher charges are 
obtained be developing faster than cheaper traffic, 
the average rate might show an increase without 
any change whatever having been made in 
specific rates. On one railway, owing merely to 
the fluctuations in the kinds of traffic carried, 
the average rate has varied between fifty and 
sixty cents in any one year, without any changes 
in rates. 

178 



THE RAILWAY PROBLEM 

The effect of combining railways into great 
systems would certainly have the same raison 
d'etre as large production in other industries; it 
would prevent competition, more or less, in lean 
years when the struggle for traffic is keen. And 
combination has gone so far that nine groups 
now own or control two-thirds of the railway 
mileage of the United States. The Vanderbilt, 
Harriman, Hill, Gould, and Pennsylvania systems 
are shown on the accompanying maps. This 
new tendency to consolidation has evidently been 
due to attempts to escape ruinous competition. 
Wasteful warfare could have been prevented by 
" pooling"; but, as that was declared illegal by 
the act of 1887, the gains of single management, 
the growing wealth of railway magnates, the 
prosperity since 1898, have tended to hasten the 
process of combination. This can be accom- 
plished by purchase, as when the Hill group bought 
the Chicago, Burlington & Quincy; or by lease, 
as when the New York Central took up the 
Boston & Albany; or by stock holdings, as when 
the Pennsylvania Company obtained a controlling 
share in the Baltimore & Ohio; or by "com- 
munity of interest," as when the Northern Pacific 
Board was made to contain the president of the 

179 



INDUSTRIAL AMERICA 

Great Northern, the executive chairman of the 
Union Pacific, a vice-president of the Pennsyl- 
vania, a director of the St. Paul, and so on. 

The decision by the Supreme Court, March 14, 
1904, declaring the holding company, known as 
the Northern Securities Company, illegal and in 
restraint of trade, because it prevented competi- 
tion between the Northern Pacific and the parallel 
road, the Great Northern, has in reality had little 
practical effect on rates. These roads and the 
Chicago, Burlington & Quincy are still jointly 
controlled through the ownership of a majority 
of stock by the same group of capitalists, and 
rate wars are effectually suppressed between these 
lines. The importance of this case, however, is 
to be found in its extension of the Antitrust 
Act of July 2, 1890, to include railways as well 
as ordinary industries. Thus railways can be 
estopped from any operations shown to be in 
restraint of trade or commerce. 

The capitalization of railways has varied ac- 
cording to growth and management. The older 
systems have mostly passed through the stage of 
youth and reached comparative stability. The 
par value of securities does not mean much, 
because the actual value has been arrived at by 

180 



THE RAILWAY PROBLEM 

voluntary purchase and sale in the open market. 
In 1900 an approximate estimate on the par 
value of $10,911,968,790 of railway securities 
showed that they had a market value of $8,351,- 
103,523. * The average capitalization per mile 
was $61,528 in 1901, as against $250,000 for 
Great Britain. As the country builds up and the 
traffic increases, the larger earnings have resulted 
in the issue of more securities. This has been 
the source of great fortunes in many cases. Not 
the cost of construction, but the development of 
traffic and the consequent earnings determine the 
value and amount of securities issued. The rates 
paid are competitive, in most cases, and bear no 
relation to the capitalization. In fact it is quite 
the other way; rates are made to develop traffic, 
and the earnings thus attained largely determine 
the amount and market value of the securities 
outstanding. 

vni 

The popular agitation for control of railway 
rates by a Government commission is no evidence 
whatever of a leaning toward Government owner- 

1 Report of Interstate Commerce Commission, February 24, 
1903. 

181 



INDUSTRIAL AMERICA 

ship. As in the case of trusts, the evident pur- 
pose of the demand for legislation is to secure 
equality of treatment for all. The spirit of self- 
help and individual initiative is as strong as ever; 
and there is no real desire for paternalism. The 
criticism of the railways is not directed against 
the regime of competition, which has so marvel- 
lously developed the country, but it is based 
mainly on the belief in inequality of treatment. 
In America we wish to be so protected from 
powerful accumulations that each can have the 
greatest individual liberty possible to work out 
his industrial salvation. "A free chance, and no 
favor" is our shibboleth — an expression of real 
laissez jaire. 

It is realized that the railways have encouraged 
free competition, multiplied settlements, and cre- 
ated opportunities for acquiring wealth. This 
freedom of competition has given full play to the 
brightest and fittest men in industry. It is because 
of this liberty that America has been developed 
so phenomenally in so short a time. Untram- 
melled commerce between the States has been 
the main factor in our greatness as a nation. And 
it has been liberty of action in the past which 
more than anything else has made possible the 

182 



THE RAILWAY PROBLEM 

energy and power of our transportation system. 
The private ownership of railways has its justifi- 
cation in having made the whole, rather than 
a part, of our country rich and populous. 



183 



VI 



THE BANKING QUESTION IN THE UNITED 
STATES 



AMERICAN banks have passed through 
nearly every possible experience known 
to such institutions. One hundred years ago 
business conditions throughout the country as a 
whole were what would to-day be designated as 
rural, and banking methods were directly affected 
by the environment. Since, for purchasers in a 
sparsely settled community, checks and deposits 
are of less practical use than notes, the history of 
early banking in the United States is largely a 
history of note issues ; and it is a very humiliating 
history. Until the panic of 1837-39, banking — 
excepting that of most of the New England banks 
under the Suffolk Bank system, of several in the 
large cities, and of the First and Second United 
States Banks — was in general not a legitimate 
occupation, but rather an opportunity for playing 

184 



THE BANKING QUESTION 

the game of speculation. In the Southwestern 
States (of that date) the Second United States 
Bank tried to enforce on recalcitrant State banks 
the necessity of redeeming their notes, as had 
been successfully done in New England by the 
Suffolk Bank; but the feeling of irresponsibility 
and speculation defeated the attempt, and, by a 
popular agitation in favor of cheap money, Andrew 
Jackson was carried into the presidency. 1 

In the earlier period (before 1838) the State 
banks, as well as the First and Second United 
States Banks, were of the type of the Bank of 
France and of most continental banks of to-day, 
and held one common reserve for both demand 
liabilities — deposits and notes. The evils of bad 
banking, however, appeared through the abuse 
of the issue function; which will explain why the 
statute-books of the various States were sub- 
sequently crowded with restrictive laws directed 
chiefly to the control of note issues. In line with 
this tendency came the New York banking act 
of 1838, which set aside a separate amount of 
bonds and mortgages as a special security for the 
ultimate redemption of the bank notes. This 

1 There is a striking resemblance between this agitation and 
that which failed to carry Mr. Bryan into the presidency in 1896. 

18s 



INDUSTRIAL AMERICA 

precedent was followed by other States, and in 
the second period, from 1838 to 1864 (in the 
Civil War), almost all the State banks provided 
a separate protection for the safety of the notes. 
The requirements varied in each State, many 
of the securities exacted were unsound, and the 
notes of State banks in circulation up to the time 
of the Civil War often bore a heavy discount, 
causing great inconvenience and losses due to 
high charges for exchange. 



The present national banking system, under 
the control of the central Government, was an 
accident of the Civil War. Secretary of the 
Treasury Chase, hard pressed to sell Govern- 
ment bonds, suggested a scheme for national 
banks based on the theory of the New York act 
of 1838, by which the requirement of United 
States bonds as a security for note issues would 
afford a market for Government loans. The 
system was finally enacted June 30, 1864, but did 
not get well established until after the close of 
the war, when the immediate need for the sale 
of bonds had passed. 

186 



THE BANKING QUESTION 

The essential characteristics of our present 
national banking system are probably well known : 

i. A general banking law exists, under which 
an unlimited number of banks can be chartered, 
providing each satisfies the requirements; and 
these banks are placed under the general direc- 
tion of a comptroller of the currency, to whom 
inspectors make their reports. 

2. Each bank is organized and managed by 
private individuals, but subject to the general 
law, and to inspection by the Government. 

3. The note issues are the promises to pay of 
the bank, and not of the United States; but the 
National Treasury acts as custodian of the Gov- 
ernment bonds owned by the bank which are 
deposited as security for the ultimate redemption 
of the notes, in case of failure or voluntary liqui- 
dation. 

4. A bank can obtain and issue notes to the 
par value (formerly ninety per cent) of the bonds 
deposited, and in no other way. There is no 
limit to the total amount of notes issued by the 
banks, as a whole; but no one bank can issue 
notes to an amount greater than one hundred 
per cent of its capital. 

5. The bonds do not form a reserve. The only 

187 



INDUSTRIAL AMERICA 

cash reserve required for immediate redemption 
of the notes is a deposit of five per cent of the out- 
standing circulation with the Redemption Agency 
in Washington. Of course each bank is obliged 
to redeem its own notes at its own counter. 

6. A note is receivable 1 for a debt to any 
national bank. National bank notes being abso- 
lutely safe, and uniformly good in all parts of the 
country, there is no reason but mutilation for pre- 
senting them for redemption. Therefore, contrac- 
tion of the notes is slow. To withdraw its circula- 
tion, a bank must deposit lawful money equal to 
the notes to be cancelled, and it will receive back 
the corresponding amount of bonds. Then, as the 
" doomed" notes come in for redemption when 
worn out, they are destroyed. But (since 1882) 
not more than $3,000,000 of lawful money may 
be deposited during any calendar month in order 
to reduce circulation. 

7. As regards the functions of discount and 
deposit, everything depends upon the character 
of the collateral in the loan item of the resources. 

1 It is also receivable for all dues to the United States, except 
duties on imports; and for all payments by the United States, 
except interest on the public debt, or in redemption of the 
national currency. A national bank note is not a full legal 
tender, i. e., " for all debts public and private." 

188 



THE BANKING QUESTION 

This depends upon the judgment of the mana- 
gers. Banks, however, are forbidden to hold real 
estate, or mortgages on real estate, in the usual 
course of discounts. Nor shall a loan exceeding 
one-tenth of the capital of the bank be made to 
any one person or company. 

8. Banks in the designated reserve cities must 
hold cash reserves of lawful money equal to 
twenty-five per cent of the deposits; all other 
banks, fifteen per cent. Lawful money includes, 
besides clearing-house certificates, gold and silver 
coin, gold and silver certificates, United States 
notes and Treasury notes of 1890 (now disap- 
pearing). Country banks may keep three-fifths 
of their fifteen per cent reserves in banks of the 
reserve cities; and banks in reserve cities may 
deposit one-half of their twenty-five per cent 
reserves in banks of the central reserve cities 
(New York, Chicago, and St. Louis). 

9. Government funds, except those received 
from customs, may be deposited with national 
banks, if secured by a deposit of United States 
bonds. 

10. The tax on circulation is reduced to one- 
fourth of one per cent, if secured by two per cent 
bonds. 

189 



INDUSTRIAL AMERICA 

ii. Reports upon a condition at a date previous 
to the call must be made five times a year. 



m 

This system of banking — as any system must 
— became a part and parcel of the very life of 
our industry and commerce, growing as it grew. 
In the accompanying diagram may be seen the 
lines which show the development from the Civil 
War (1865) to the present time. In comparison 
with 1865 the changes to 1905, during forty years, 
are as follows (in millions of dollars): 



1865 



1905 



Number of banks 

Capital I 
Surplus \ ' 

Reserve] ^tenders 

Circulation , 

Private deposits 

Loans (discounts) 



1,513 


5,757 


$393-2 


j $799-9 
1 417-8 


38-7 


18. 1 


J 495-5 
1 170- 1 


190. 


i7i-3 


521.2 


549-1 


3,882.8 


487.2 


4,028.4 



The total capital and surplus of the national 
banks is (in 1905) $1,217,700,000, on which it 
does a business represented by $4,028,400,000 of 
loans and $3,882,800,000 of deposits. The total 

190 



THE BANKING QUESTION 

capital and surplus of all commercial banks in 
the United States is $3,026,788,000, and their 
deposits are $11,861,619,000. As compared with 
the principal European and other foreign banks 
of issue, the banks of the United States have a 
greater capital, but the combined European and 
other foreign banks carry heavier deposits — as 
was to have been expected: 





United States banks 
[millions]. 


Principal European 

and other foreign 

banks of issue 

[millions]. 


Capital 


$i,539-8 
1,486.9 

11,861.6 


$1,191-4 
536.1 

14,789.7 


Surplus, etc 


Deposits (including Government 
deposits) 




Total 


$14,888.3 


$16,517.2 





While the United States has a greater banking 
power, as represented correctly by capital and 
surplus, than foreign countries, the latter exceed 
us in the business done, as represented by deposits. 
The capital and surplus of all American banks 
is about one-fourth of the $13,525,623,300 in- 
vested in American railways. 



191 



INDUSTRIAL AMERICA 



IV 

The operations of a banking system are neces- 
sarily connected intimately with credit and with 
the monetary system of the country. It is usual 
to suppose that banks touch the monetary problem 
only through their note issues; yet, in reality, the 
banks are furnishing, through the functions of 
discount and deposit, the most effective medium 
of exchange ever known. The confusion of the 
popular mind on this matter has obscured the 
issue; and as a consequence we have had in the 
past no agreement upon the exact things to be 
reformed. The authorities at Washington, con- 
sequently, decline to take up and push legislation 
until the reformers and the country can agree 
upon what should be done. Such an attitude, 
of course, means no legislation at all; because a 
true analysis of the monetary and banking ques- 
tions can be made only by experts, and to throw 
such problems into politics is only to excite endless 
ignorant discussion and to prevent reform. As 
in times past, almost no reform of our monetary 
system has ever been gained except by some great 
disaster; we have drifted with the course of events 

192 



THE BANKING QUESTION 

until some catastrophe has brought about en- 
forced legislation. Not study and experience of 
the past, but only hard knocks, have produced 
monetary progress in the United States. 

To understand the present demand for a more 
elastic currency it will be necessary to examine 
the practical processes by which banks provide 
a very effective medium of exchange through 
the use of deposits and checks drawn on them by 
depositors. In brief, we may refer to this form 
of money as the deposit currency. 

In the United States — as well as in Great Britain 
— the deposits of banks originate chiefly from 
discounts. A discount, or loan, is desired by a 
business man who has sold goods on time (for 
thirty or ninety days), and he wishes to obtain 
and use now the sums due him from buyers in 
the future. On the basis of actual goods sold, as 
evident by bills of lading or by bills of exchange 
accepted by the buyer, the selling merchant can 
coin these goods into means of payment by help 
of the bank. The bank buys from the merchant 
the right to receive a certain sum of money in 
the future (thirty or ninety days, as the case may 
be), and gives to the borrower in exchange a right 
to draw current money on demand. This is a 

193 



INDUSTRIAL AMERICA 

credit transaction, the essence of which is a trans- 
fer of goods, or their equivalent, under an obliga- 
tion to return an equal value some time in the 
future. As the first result of this loan, the bank 
credits the borrower with a deposit (less the 
discount), which is a demand obligation of the 
bank. This deposit furnishes the borrower with 
the desired means of payment which he can direct 
toward any desired goods in the market. If, in 
the first instance, he had manufactured harvesters 
and sold them to jobbers on time, he has coined 
these goods into means of payment with which he 
can purchase materials for new products. 

The possession of a deposit account is based 
on the antecedent possession of salable goods; 
and that account allows the seller to demand any 
form of current money, or, in the form of a check, 
to transfer to others — of whom he is buying new 
goods — his right to draw on demand. The 
borrower, in large transactions, has no reason for 
drawing out money from his deposit account; 
the money may be lost, burned, or stolen. He 
has no reason for taking out actual cash from 
the reserves of the banks, provided a check will 
give him as good a means of payment as other 
forms of money. In financial centres, and in 

194 



THE BANKING QUESTION 

wholesale and nearly one-half of retail transactions 
in the United States, practically all payments are 
made by checks and bank-drafts based on de- 
posits. In New York some ninety-eight per 
cent, and in the country as a whole over ninety 
per cent, of all payments over the counters of the 
national banks are made in this deposit cur- 
rency. 

It is to be noticed how clearly this medium 
of exchange follows from, and originates in, an 
actual transfer of goods, securities, or property 
of some form. The bank does not "coin its 
credit"; it does not make something out of noth- 
ing. The bank simply aids the merchant, or 
producer, in the general process of exchanging 
goods expeditiously; and it does this whenever a 
legitimate transaction in goods has taken place, 
and if the bank is asked to coin these goods into 
present means of payment. In short, the crea- 
tion of the medium of exchange by the banks, in 
this fashion, is the consequence, and not the 
antecedent cause, of a movement of goods. Men 
do not wait until the supply of checks and drafts 
is large enough to float their goods, but they 
price, and sell, their goods in terms of the standard 
of the country, and then the deposit currency 

IQ 5 



INDUSTRIAL AMERICA 

arises in amount to correspond to the values of 
the goods set in exchange. Here, therefore, we 
find a medium of exchange created by the banks, 
which must inevitably expand and contract with 
the values of goods bought and sold. Hence, if 
practically all of the large transactions are per- 
formed by means of this form of money, the 
work done by the deposit currency is a fair test 
of the expansion or contraction of general trade 
throughout the country. And this is not a theo- 
retical conclusion, but a statement of a fact upon 
which every intelligent business man actually 
relies. 

The deposits of the banks are always being 
extinguished and renewed. At any one moment 
they represent, in the main, the sum of active 
paper discounted. Although obviously less than 
the total amount of transactions in goods, the dis- 
counts reflect the general mass of exchanges of 
goods, rising or falling accordingly. The deposits 
consequently, rising or falling with discounts, 
afford the basis for the checks drawn by depositors. 
It is not the sum total of the deposits, but the 
sum total of checks, which shows the work done 
by this medium of exchange. That is, the de- 
posits form the instrument whose work is ex- 

196 



THE BANKING QUESTION 

pressed by the total value of the checks used. 
The volume of checks, and the transactions they 
effect, are shown by the clearing-house returns. 
As every one knows, the banks in each city pre- 
sent each day at a clearing-house all the checks 
drawn on other banks, and each receives all 
checks drawn on its own bank. The work per- 
formed by checks and deposits can be seen in the 
figures of total clearings. In 1905 the total de- 
posits of American banks were $11,861,600,000, 
and the work done by the deposit currency, as 
a medium of exchange, is expressed in the clear- 
ings of the whole country, which in 1905 amounted 
to $140,000,000,000. 

In the act of making a loan, the resources of 
banks are added to in the form of promissory 
notes and collateral; and the deposits appearing 
on the liabilities' side of the account have the 
security of the assets behind the loan item. That 
is, the deposit currency is as sound as the resources 
received for loans; and as the loans are, in the 
main, based on transactions in goods, the deposit 
currency has a security corresponding to the 
soundness of general trade and industry. This, 
after all, is the only real security for business 
engagements, be they bonds, mortgages, or notes. 

197 



INDUSTRIAL AMERICA 

If general business is unsound, all else becomes 
unsound. 

It is evident that no correct understanding of 
the monetary and banking problem in the United 
States can be reached without fully considering 
the work and operations of the deposit currency. 
It has been a natural evolution, and not at all 
the result of legislation. Moreover, it has not 
been forced by the banks on the business world; 
but, on the contrary, it has been the outcome of 
an attempt by the banks to satisfy the wishes of 
their constituents. Whether a bank grants to a 
borrower its own notes, or the right to draw on a 
deposit account, depends not upon the will of 
the bank, but upon the condition and will of the 
borrower. This is a hard saying and a stum- 
bling-block to some of our people. Nor does it 
make any difference to the profit of the bank 
whether, in making a discount, it gives its own 
notes or whether it creates a deposit account- 
In each case the profit to the bank consists in 
granting, either by notes or by a deposit, a sum 
less by the amount of the discount than the sum 
coming to it in the future when the loan matures. 
This, also, is a hard saying to some: they assume 
that the banks make a special profit in issuing 

198 



THE BANKING QUESTION 

notes, which is not true. One fact alone would 
show this error: the largest and richest national 
banks in the country make little or no use of their 
right to issue notes, and yet they serve their 
patrons perfectly by use of the deposit currency, 
thus making the usual profits and accumulating 
the largest surpluses ever known. The same is 
true of large banks outside the national banking 
system which issue no notes at all. 

The national banking system has grown with 
the growth of our industries and of our wealth. 
It has expanded its discounts and deposits in 
proportion as the transactions in goods have ex- 
panded. Therefore, it is of pertinent interest 
to note, in the diagram (at p. 190), in what 
form of money — notes or deposit currency — the 
national banks have been called upon in the past 
to serve the exchange of goods for the business 
community. Since the important point of re- 
sumption of specie payments, January 1, 1879 — 
an epoch-making event in our monetary history 
— the movement of the line of discounts sharply 
upward is accompanied by the line of deposits, 
while the line indicating the notes in circulation 
has fallen — and risen somewhat only after 1900. 
In other words, the marked rise in the business 

199 



INDUSTRIAL AMERICA 

of the banks has been accomplished by prac- 
tically no additional use of national bank notes; 
while the whole increase of work has been met 
by the use of deposits and checks. 

In view of the fact that the deposit currency is 
the medium of exchange for over ninety per cent 
of the wholesale transactions of the country, and 
that it is the chief kind of money now in actual 
use in large cities and financial centres, it is clear 
that for these purposes and places we have an 
absolutely elastic currency for all ordinary sea- 
sonal fluctuations of business — expanding exactly 
with the increase, and contracting exactly with 
the decrease, of transactions. But when we pass 
from the elasticity desired in seasonal changes of 
the demand for money to that desired in the time 
of a stringent money market, or of a commercial 
crisis, very different questions arise. To this last 
question we may now address ourselves. 

In a time of panic, business men are eagerly 
trying to find means of payment with which to 
meet their maturing obligations. Not to get a 
discount on legitimate collateral is to fail, and 
one failure brings on others. It is to the self- 
interest of the bank to prevent failures, because 
the soundness of its collateral in the loan item is 

200 



THE BANKING QUESTION 

the ultimate basis of its ability to meet its demand 
deposits. This is literally true; for, although the 
bank holds a cash reserve for its deposits, this 
reserve equals but a fraction (one-fourth or less) 
of the total deposits. And yet, in the fright of a 
panic, borrowers are pressing for loans at the very 
time when goods and securities are being thrown 
on the market at falling prices. In such extreme 
crises, or in more moderate stringencies, how 
far can the deposit currency be created by the 
banks to give borrowers a means of payment? 
It is very clear that other kinds of money — gold, 
greenbacks, or bank notes — are not attainable in 
such an emergency. But not to lend to borrowers 
on good collateral is to aggravate the distress. 
And yet, in our national banking system, the 
required legal reserve prevents an addition to 
deposits (following upon a loan) which would 
make the existing cash reserves a less percentage 
of the deposits. 

The remedy for this situation is the creation of 
a new form of demand liability, known as clear- 
ing-house certificates, which are, in essence, a 
means of payment quite similar to the deposit 
currency. The latter arose from collateral based 
on a transaction in goods, which were, by the bank, 

201 



INDUSTRIAL AMERICA 

coined into means of payment. The former are 
created by taking the pick of the collateral in the 
loan item, and issuing to the extent of seventy- 
five per cent of them the promises to pay of the 
combined banks in a given city. These promises 
to pay, called clearing-house certificates, are 
given to the needy bank whose collateral has been 
used; and the bank can thus take the new col- 
lateral of hard-pressed borrowers as security for 
new loans, and give in return the clearing-house 
certificates, which are acceptable means of pay- 
ment for debts to any banks in the association of 
that city. By this means solvent persons can 
meet their obligations, even when ordinary forms 
of money are unattainable. Collateral which 
arose from the exchange of goods is used as the 
basis for a means of payment, which therefore 
becomes the only means of payment available 
in times of panic; thus bringing into operation 
the same principle according to which deposit 
currency serves the borrower in normal conditions. 
In England, under like conditions, a remedy 
similar in principle to the clearing-house cer- 
tificates exists in the suspension of the bank act, 
by which the banking department can obtain 
notes for its reserves by taking to the issue de- 

202 






THE BANKING QUESTION 

partment Government bonds and getting notes 
beyond the legal limit. 



The whole problem of elasticity, however, 
which now interests American business men is 
not covered by the foregoing exposition. To 
many of them the question seems to centre wholly 
around the present inelasticity of the bank issues. 
To satisfy this need of an elastic bank currency, 
many plans, including the so-called "asset cur- 
rency," or modifications of it, have been proposed. 
Before examining the schemes for elastic bank 
notes, it would be desirable first to explain wherein 
the present system of notes is deficient. 

To complete the process of making a discount, 
the bank should be able to give to the borrower 
the right to draw on demand in the form desired 
by him, whether it be a deposit account or a 
bank note, without being obliged to discriminate 
against one or the other form. As it is now — 
but less emphatically since the act of March 14, 
1900 — the expense of obtaining notes through the 
deposit of Government bonds is such as to make 
that form of demand obligation more onerous to 

203 



INDUSTRIAL AMERICA 

the ordinary bank than the deposit account. 
And yet in certain parts of the country, chiefly 
rural districts, the borrower may wish only notes, 
so that he can pay for goods in travelling through 
places remote from banks where his checks would 
not be accepted. Since the offer of checks im- 
plies the convenient recourse to a bank, by which 
the validity of the personal obligation may be 
verified, a check is not so good where the drawer 
is unknown as is the note of a national bank 
established under a general law and which is 
inspected by the Government. Hence a bank, 
when called upon by its constituency for notes, 
should be able to provide notes as cheaply to 
itself as it could a deposit account. In the past 
this has not been true; and before 1900 the notes 
did not increase in response to the ordinary de- 
mands of business. 

The reason for this lack of profit to the bank 
in issuing notes was that the bonds required for 
security bore a very high price; and yet notes 
could be issued to only par (formerly ninety per 
cent) of the bonds. Lately, however, the ex- 
istence of two per cent consols, quoted at 102-103, 
has lessened this difficulty, and the circulation 
of the national banks has increased to the highest 

204 



THE BANKING QUESTION 

point known. 1 But the obvious consequence of this 
system of notes, whose issue is directly affected by 
the price of bonds, is that the amount of notes put 
out by the banks is determined, not by the needs 
of borrowers, or the conditions of trade, but by 
the extraneous circumstances which touch the 
credit of the Government, the existing form of 
the national bonds, and their market price. 
Moreover, an increase in the commercial rate of 
interest increases the disposition to invest funds 
directly as against the indirect process of buying 
bonds and then loaning the notes secured by 
those bonds. Therefore, just at the time when the 
market rate of loans is high, and when borrowers 
are most likely to need loans, there is the least 
advantage to the banks in enlarging their cir- 
culation. 2 In short, a bond-secured circulation 
is especially inelastic, and little responsive to the 
actual needs of the business public. Hence, in 
those parts of the country, and in those condi- 
tions, when and where notes, instead of deposit 
currency, are demanded by borrowers, there is 
little rapid adjustment to practical needs. To 
this difficulty is to be added the fact that, even if 

1 See diagram at p. 190. 

2 Cf. Report of the Monetary Commission of 1898, pp. 224-30. 

205 



INDUSTRIAL AMERICA 

the emergency is very critical, there would be a 
delay of some weeks in obtaining new notes based 
upon bonds. 

To the extent that American business habits 
call for a medium of exchange in the form of 
bank notes — and not of deposit currency — the 
inelasticity of the national bank circulation is 
evident and mischievous. To the extent that the 
bank notes are depended upon, their rigidity would 
increase the intensity of any monetary stringency. 
In order to remove this bad effect of a rigid note 
circulation, the reform chiefly proposed has been 
a system of note issues secured, not by a special 
deposit of bonds, but, first, by a guarantee fund 
of five per cent; second, by a first lien upon the 
assets of the bank (i. e., all the collateral in the 
loan item, closely related to transactions in goods) ; 
and, third, by the stockholders' liability. The 
notes thus secured would be safe beyond a possi- 
bility of doubt; for a limitation of the issues to 
some percentage of the capital would of itself 
make the notes a very small percentage of a very 
large body of assets in the loan item. To-day 
the total capital of all the national banks is about 
$800,000,000, while the loan item alone is about 
$4,000,000,000. In addition, notes to a less 

206 



THE BANKING QUESTION 

amount than the capital would be protected not 
only by the assets in the form of loans, but by a 
very great mass of bonds and other forms of 
assets--bonds and other securities in the resources 
now amounting to $667,000,000. 

To Germans the suggestion of notes secured 
partly by commercial assets (paper running not 
over three months) is familiar, since it is part of 
the plan on which the Reichsbank issues notes 
to the sum of 385,000,000 marks. But to Ameri- 
cans the change from notes secured by bonds to 
notes secured by commercial assets seems un- 
familiar; and the chief opposition to it comes 
from the bankers themselves. The proposal of the 
Monetary Commission of 1898 was a conservative 
one, in that it suggested issues only to a limited 
percentage of the capital, and imposed a tax of 
two per cent if over sixty and less than eighty per 
cent, and of six per cent if over eighty and within 
one hundred per cent of the capital. This emer- 
gency tax is also known to all acquainted with 
the system of the Reichsbank. 

In reality, the limitation of bank issues to the 
actual capital paid in is a relic of by-gone times. 
The business done by a modern bank, and the 
amount of its loans and deposits, bears no direct 

207 



INDUSTRIAL AMERICA 

relation to its capital. For each loan, the bank, 
if wisely managed, obtains sound securities in its 
assets to a value greater than the loan; and a 
bank is not limited in making loans by its capital, 
but only by the quality and soundness of the 
collateral offered. The Chemical Bank of New 
York, for instance, has a capital of only $300,000 
(and a surplus of perhaps $5,000,000), but it has 
loans of more than $50,000,000. To limit the 
amount of notes which such banks could issue 
to their capital would be ridiculous (that is, if 
they ever wished to issue notes, which they gener- 
ally do not wish). 

The objection to this so-called "asset currency' ' 
is not easy to state definitely. In general, many 
American politicians are under the impression that 
to enlarge the powers of banks to issue notes is 
to give them favors, to enable them to make 
additional profit, to allow them to control the 
money market, or in brief to grant the "money 
power" greater influence over the people. They 
overlook entirely the long-existing fact that the 
great city banks make little or no use of bank 
issues; but that they can do their business suc- 
cessfully, make great banking profits from dis- 
counts, and accumulate enormous surpluses by 

208 



THE BANKING QUESTION 

the use of the deposit currency alone. The would- 
be defenders of the people against the money 
"octopus" are in fact unwilling to allow the small 
country banks, of whom notes are demanded, to 
have the only means of helping their country 
constituents which are available in times when 
loans are most appreciated. In truth, the greater 
the facility in giving the borrower notes — if he 
requires that form of money — the cheaper can 
loans be made to people in the less populous parts 
of the country. 

Bankers, to some extent, dislike to adjust them- 
selves to changes. Others, no doubt, believe that 
a unified scheme by which all banks are held, 
even lightly, responsible for the security of the 
notes of other banks through a guarantee fund, 
is objectionable. This objection, however, is 
only fanciful and not real. The losses to note- 
holders of failed national banks in the past, not 
met by their own assets, and which would fall 
upon a common guarantee fund, would be only 
about one-seventieth of one per cent. 1 Besides, 
the emergency tax would soon fill up the guar- 
antee fund in a way to protect any bank from 

1 Cf. Report of the Monetary Commission of 1898, Sec. 168, 
p. 266. 

209 



INDUSTRIAL AMERICA 

having its contributions to the fund used in re- 
deeming the notes of failed banks. 

The objection that the issue of notes secured 
by commercial assets would encourage irrespon- 
sible issues, would unduly inflate the currency, 
and aggravate the severity of panics is, also, of 
very little weight. In truth, good or bad banking 
in any system depends entirely upon the kind of 
discounts made, and not upon the form of liability 
created in behalf of the borrower. As things now 
stand, the great city banks, whose acts are most 
influential, can unduly inflate the currency, build 
up an unsound situation, and enormously ag- 
gravate panics, by making loans on unsound 
collateral solely through the use of deposit cur- 
rency, and without the use of their issue function. 
The right to issue notes on assets would not 
stimulate them, when they can now accomplish 
the same end by creating an equally effective 
medium of exchange in the form of deposit 
currency. Inspection, and publicity, of the kind 
of securities received for loans is the real pro- 
tection for the evils thus wrongly attributed to a 
system of "asset currency.' ' Indeed, the trust 
companies and State banks, not under Govern- 
ment inspection, are the very ones that issue no 

210 



THE BANKING QUESTION 

notes, and yet they are the ones that have had the 
largest share in the promotions of recent years. 
Danger is to be looked for more in the character 
of the assets than in the particular form of demand 
liability. 

Some national bankers, also, feel that State 
banks would gain in deposit accounts if national 
bank issues were made a first lien upon the assets 
before the deposits; because depositors might wish 
to deposit where no prior lien exists, should 
liquidation ever become necessary. On analysis 
it will be found that this danger is largely im- 
aginary. The safety of deposits in any bank, 
State or national, depends entirely on the sound- 
ness of the investments and the character of the 
loans. If a bank is wisely managed, and issues 
"asset currency," for every note issued the bank 
receives good assets to protect the notes; and every 
use made of deposits is likewise well protected. 
Hence, in time of liquidation there would be good 
security for both notes and deposits. On the other 
hand, if a State bank, which issued no notes, re- 
ceived the deposits, the safety of the latter would 
depend wholly upon the character of the assets. 1 

1 Secretary Shaw has recently recommended an issue by the 
banks of "Government-guaranteed currency" equal in amount to 

211 



INDUSTRIAL AMERICA 

In another respect, it is urged that the bank notes 
would be more elastic, if the requirement that not 
more than $3,000,000 may be withdrawn in any 
one calendar month were repealed; because large 
banks not now issuing notes might be inclined 
to put out notes in time of stringency, provided 
they could easily withdraw them after the emer- 
gency had passed. 

Apart from the issue of notes, it is held by some 
that the Treasury ought not to keep its large 
balances out of the money market; and that the 
deposits of Government funds with the national 
banks could be safely made by accepting other 
than national bonds as a security for the deposits. 
So far only Government bonds have been accepted, 
and once the line is crossed to other securities 
the danger will be in not knowing where to stop. 
It will be a grave responsibility to decide which 
bonds shall have Government approval and 
which shall not. Moreover, it is a question 
whether the Treasury should ever be asked to 
rescue the banks from a situation really created 

fifty per cent of the bond-secured currency maintained by them, 
and taxed five or six per cent while outstanding. It is objected 
that bank notes ought not to be guaranteed by the Government, 
since it forces the Treasury to share in the responsibility of banking 
operations. 

212 





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THE BANKING QUESTION 

by the undue expansion of their own credit opera- 
tions, and not by any real lack of a medium of 
exchange 

VI 

The question of an elastic bank currency finally 
relates itself to the part which the bank currency 
plays in the whole monetary system of the United 
States. In the diagram, showing the various 
media of exchange now in use in the United 
States, it will be observed that the national bank 
notes form but one out of many other kinds 
of money. The Treasury notes of 1890 will 
soon entirely disappear; the United States notes 
(greenbacks) have a fixed limit, are rigidly in- 
elastic, and ought to be retired; the silver circula- 
tion, which once was a great peril, is now limited, 
and cannot be increased ; while gold coin and gold 
certificates, for which we can draw upon the world, 
are perfectly elastic and have steadily increased 
of late. In fact, the only really elastic parts of 
our currency are now gold and the deposit cur- 
rency. The national bank notes have of late 
increased considerably; but, even if an elastic 
system of "asset currency" were allowed to the 
banks, limited to a percentage of the capital, 

213 



INDUSTRIAL AMERICA 

whereby the needs of the country in rural districts 
would be served, still the total demands of busi- 
ness for a medium of exchange would be only 
slightly affected. In such a case the increasing 
demands for a medium of exchange would con- 
tinue to be met principally by the elastic deposit 
currency. 

It should not be understood that this conclu- 
sion implies any uselessness in the effort to pro- 
vide bank notes which should be sensitive to the 
increasing or diminishing demands of the public. 
Far from it; where notes are wanted, the need is 
an imperative one. And if the United States 
notes are retired — as they should be — there would 
be additional uses for bank notes. But even then 
these additional uses could be provided for by 
more gold certificates, quite as well as by more 
bank notes. The point to be kept in mind is 
that the introduction of elastic bank notes would 
touch only one — and that not a predominant — 
part of our currency. Its merit is that it would 
help the constituencies of the smaller banks. An 
elastic bank circulation would not do much to 
ameliorate the conditions of stringency which 
now and then arise in central money markets 
like New York. 

214 



THE BANKING QUESTION 

The relation of the New York banks to mone^ 
tary stringency is peculiar, and has more or less to 
do with the exceptional concentration of banking 
demands upon New York institutions, since the 
rage for promotions has been so pronounced. 
For one thing, the smaller banks have been 
depositing their idle funds with New York bank- 
ing houses. Also, the great combinations have 
been financed largely through New York banks, 
public and private, and through the trust com- 
panies, while the local manufacturing companies 
have ceased to apply to local banks for loans as 
in former times. Thus funds, which in easy 
times accumulate in the central money market, 
have been used to a greater or less extent in sup- 
porting the market for securities — sometimes those 
of the new promotions that have not yet found 
their true level. Consequently, any very con- 
siderable upheaval in the market for general 
securities will directly touch the value of the 
collateral held by the banks. If these banks, or 
many of them, have enlarged their loans upon 
these debatable securities, and have swollen to 
their full girth on such business, they find their 
ability to make new loans — even legitimate loans 
— in a time of even slight pressure greatly 

215 



INDUSTRIAL AMERICA 

limited. For instance, the country banks, in a 
close money market, will need funds, and, of 
course, will draw on their New York, or city, 
correspondents. In such emergencies as these 
the New York banks are sure to feel the 
pressure from within and from without, and to 
lament the evils of our currency system. In truth, 
the currency system is not mainly, or at all, in 
fault. The banks wish to hold on to exist- 
ing financial deals, to keep up the values of 
securities. They could easily meet the demand 
for legitimate loans if they took in sail and 
reduced their expanded discounts on favorite 
promotions. With funds provided in times of 
easy money, the city banks have entered into more 
extensive operations than they can manage in 
times of difficulty. The remedy in such situations 
is not to be found in an elastic currency, but in a 
revision of the character of their collateral. And 
there is nothing whatever to prevent these banks 
from enlarging their cash reserves if they are will- 
ing to go to the expense of exchanging interest- 
bearing resources for gold, which, being accessible 
in all the markets of the world, can be had in any 
quantities needed. Gold being elastic, it could 
be had to increase reserves; and it would permit 

216 



THE BANKING QUESTION 

new loans, which could be completed satisfac- 
torily by the deposit currency, even if no more 
bank notes were accessible. 

In a commercial crisis a rigid currency great- 
ly exaggerates difficulties which in their nature 
are bad enough. The over-trading and over-es- 
timate of the true worth of goods and securities 
which always precedes a panic is invariably 
followed by a depreciation of the same goods 
and securities after the collapse. There is then 
tremendous pressure by borrowers for loans in 
order to secure time in which to liquidate without 
unnecessary sacrifice of assets. Many establish- 
ments may have so badly misjudged their chances 
that failure and subsequent liquidation is inevi- 
table. The power to issue more bank notes, or 
more deposit currency, would be no help to 
such desperate cases. But well-managed houses, 
as yet sound, but which have failed to make col- 
lections due them, can be saved, and the general 
volume of bankruptcy limited, by any device 
which will permit the banks to extend their loans 
under such circumstances. At this emergency 
the fixed legal reserve is a dangerous factor; not 
to loan on satisfactory collateral is to invite an 
extension of the crisis which may finally damage, 

217 



INDUSTRIAL AMERICA 

if it does not destroy, the bank itself. A legal 
emergency circulation, therefore, more or less 
heavily taxed to secure its early withdrawal when 
no longer needed, would serve a signal need. 



vn 

The effects of the great promotions since 1898 
upon the business and holdings of the national 
banks have been unmistakable. It goes without 
saying that the banking resources must reflect 
the general character of the country's transac- 
tions. Before the days of large trusts, the inte- 
rior banks, when ordinary commercial paper was 
scarce, obtained parts of large loans made to great 
establishments through note-brokers. Now, since 
these concerns have usually been organized as 
stock companies, and their finances are managed 
through the banks of the larger cities, the supply 
of short-time paper does not seem so abundant 
as it has been. But with the growing wealth of 
the country, the item of deposits not arising 
directly from loans has increased at the same 
time with the growing difficulty in rinding the 
former kinds of investment. This state of affairs 
has forced the banks to invest in selected bonds 

218 



THE BANKING QUESTION 

and securities, paying a relatively low rate of 
interest, thus forming an important item in their 
resources, standing as regards quickness of liqui- 
dation between the cash reserves and the discount 
item. These securities yield an income for idle 
funds larger than could be had from deposits 
in other banks, and in times of active money they 
could be sold and the reserves increased, so that 
additional loans could be made at the higher rate 
prevailing on business paper. How important 
this tendency to hold these investments is, and 
how it has developed pari passu with the extension 
of capitalizing industrial plants, may be seen from 
the following figures* 



Stocks, Bonds, Securities, held by the National Banks 
(in millions). 



1880 $41.2 

1885 75-i 

1890 116. 8 

1895 196-9 

1896 192.0 



1897 $198.2 

1898 230.3 

1899 276.7 

1900 330.6 

1901 39i-4 



1902 $458-7 

1903 511-2 

i9°4 527-7 

1905 667.1 



According to a recent investigation, 1 based on 
returns from 4,000 national banks, State banks, 
and trust companies, the total investment by 
banks in bonds (not including Government bonds) 

1 Bonds as a Safety Reserve for Banks, by William C. Corn- 
well, 1905. 

219 



INDUSTRIAL AMERICA 

is $1,771,682,000, of which fifty-two per cent are 
railroad bonds, thirty-two per cent municipal 
bonds, and sixteen per cent are of a miscellaneous 
character. 

These holdings suggest that the banks may 
have been sharing in underwriting schemes; but 
this is probably true only of the banks in the great 
money centres. In New York City, however, 
out of $206,345,000, it appears that 61.50 per 
cent are railroad bonds, 24.25 per cent municipal 
bonds, and 14.25 per cent (or $47,811,000) are 
miscellaneous. These bond investments prob- 
ably have been made largely because of the scarcity 
of commercial paper. How these holdings will 
act in times of a great depression on the solvency 
of banks remains to be seen. The existing 
"community of interests " among the few leaders 
of high finance is evidently intended to act as a 
steadying influence on the money markets. It 
still remains true, however, that no power has 
hitherto ever been able to maintain any large 
mass of securities at an artificial value, distinct 
from their real value dependent on the stability 
and amount of earnings. 

In general, it is to be said in conclusion that 
the national banks never were in sounder con- 

220 



THE BANKING QUESTION 

dition than they are to-day; because time and 
experience have made the bank officers more 
competent for the work of deciding rightly upon 
safe collateral than they have ever been before. 
Cases of fraud are rare, and sporadic. The 
national banks are hard pushed by competing 
trust companies — who also carry on the discount 
and deposit functions, in addition to managing 
trusts and other operations; but they are now 
firmly interwoven with the business fabric of to- 
day. The sense of honor is generally high. The 
whole test of practical success is to be found in 
the soundness of the loans made; good banking 
management is possible under a bad system, and 
bad management is quite possible under a good 
system. The national banking system is, on the 
whole, a good one, and the management is likely, 
on the whole, to be good. 



221 



VII 



THE PRESENT STATUS OF ECONOMIC THINK 
ING IN THE UNITED STATES 



THE thinking of a Galileo was very widely 
different from the thinking of the world in 
which he lived. Indeed, the characteristics of the 
thinking of any body of specialists must neces- 
sarily be very different from the popular impres- 
sions actually influencing conduct within a certain 
field of activity. The convictions of the economic 
experts of the United States are the outcome of 
various streams of influence, traceable to past 
intellectual inheritances and to surrounding con- 
ditions; and, in a similar, but in a more complex 
manner, the existing economic thinking of the 
untrained citizen has its origin in many converging 
influences each of which has had its effect on the 
final result. The story of the one, however, is 
quite different from the story of the other, while 
the reaction of the one upon the other is quite as 

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STATUS OF ECONOMIC THINKING 

interesting as the effect of any two lives or two 
countries upon each other. Especially suggestive 
has been the process in a new and fertile land, 
where exuberance of thinking was certain to 
accompany the exuberant productivity of its 
industries. 



The independence of the United States coincides 
exactly with the publication of Adam Smith's 
" Wealth of Nations"; and for one hundred years 
little or no contribution was made to economic 
principles by American writers. 1 The manuals 
of Wayland (1837), Amasa Walker (1866), and 
Perry (1866) reflected more or less English think- 
ing, but added nothing original. The eccentric 
writing of Henry C. Carey has attracted more 
notice in Europe than that of any other early 
American economist; but his attacks upon the 
Ricardian theory of rent and the law of Malthus 
are no longer seriously considered, while no one- 
would now assign to him the credit for establish- 
ing any new principle affecting value, money, 
or international trade. Nor have public men like 

1 Cf. C. F. Dunbar, Economic Essays, pp. 1-30. His study on 
Economic Science in America, 1 776-1876, is unequalled. 

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INDUSTRIAL AMERICA 

Franklin, Hamilton, Gallatin, Calhoun, Webster, 
Lowndes, Benton, Clay, and Chase made any 
additions to political economy — although Hamil- 
ton seemed by natural gifts the most promising 
of all. 

The barrenness of the economic field in America 
is conspicuous in contrast with the rise of econo- 
mists such as Malthus, Say, Ricardo, Sismondi, 
Senior, von Thiinen, Rau, Cournot, Hermann, 
Hildebrand, Knies, Roscher, Mill, Cairnes, Menger, 
Wagner, and Schmoller, during the same period 
in Europe. Nor can this paucity of intellectual 
accomplishment be assigned to any lack of native 
ability or adaptation to economic studies by 
Americans. This shortcoming, moreover, cannot 
be attributed wholly to the lack of stimulating 
practical issues, for the currency and the tariff 
early enlisted popular attention. Partisan poli- 
tics, and, later, the absorption in the overwhelm- 
ing slavery question left no room for a serious 
examination into the origin and workings of 
economic principles. The reason for the sterility 
of American economic scholarship in this first 
century of our existence lies deeper than this: 
we have been absorbingly occupied in conquering 
a broad and productive land, and purely practical 

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STATUS OF ECONOMIC THINKING 

questions occupied the best brains of the country 
to the exclusion of all examinations into the 
fundamental principles of many other sciences 
as well as of economics. The nature of our 
environment sufficiently accounts for a striking 
deficiency in our scientific life until some thirty 
years ago. 

m 

The intellectual ferment and critical activity 
now evident in economic studies in America stand 
out in sharp contrast to the lack of results in the 
earlier period. It is an old saw that "the shaken 
tree bears the more fruit." In the Civil War 
the American mind was stirred as never before, 
and with the extension of newspapers, the tele- 
graph, and railways, American thinking began to 
lose its provincialism and to become engaged on 
problems of national importance. The Civil War 
of necessity directed attention to questions of 
taxation, tariffs, money, banking, national debts, 
and economic problems on a scale never before 
dreamed of. It revealed also the nonexistence 
of a class of trained economists able to discuss 
intelligently, and on the basis of the experience 
of other countries, the practical policy to be 

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INDUSTRIAL AMERICA 

followed by our legislation. There was discus- 
sion, to be sure, ebullient, self-confident, narrow, 
and uninformed. In due course of time, as always, 
the men began to respond to the need. There 
was in harness already a small group of older men 
like David A. Wells, the Commissioner of Internal 
Revenue and the advocate of tariff reform; 
Edward Atkinson, stimulating writer on free 
trade, money, and statistics ; Professor William G. 
Sumner, of Yale, free trader and student of money; 
Professor Charles F. Dunbar, of Harvard, preemi- 
nent for acumen and accurate scholarship on 
finance and banking; Gen. Francis A. Walker, of 
Yale, creator of census methods, and student of 
money, wages, and the manager's profits — and a 
few others, including Henry George. 

After 1880 a crop of younger men appeared, 
many of whom had studied in Germany, and had 
been influenced by the German point of view on 
Government interference and the historical method 
of economic discovery. Among these may be 
mentioned J. B. Clark, R. T. Ely, E. J. James 
H. C. Adams, E. R. A. Seligman, S. N. Patten, 
J. W. Jenks, and R. Mayo-Smith (now dead). 
That is, on an English stock of economics was 
grafted a strong branch of German influence; and 

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STATUS OF ECONOMIC THINKING 

the resultant was a vigorous life of enterprising and 
eager study. The injection of German tendencies 
has given a cosmopolitan character to economic 
discussions, and has removed whatever narrowness 
may have lingered from the exclusive attention to 
English predecessors. With one or two older men, 
such as F. A. Walker and Henry George, both now 
dead, the work of this group shows not merely a 
reaction against the system worked out by the 
English school, but a strong movement to an 
extreme position away from it. How much of 
the results of this movement are likely to become 
permanent acquisitions to the body of economic 
principles, of course, remains to be seen; but 
there can be no question as to the stimulus to 
discussion arising from the varied and differing 
points of view which have appeared in the last 
few decades. 

When the observer looks over the whole field 
at the present day (1906), and tries to consider 
tendencies and results, he is still aware of the 
strong forces of inherited and racial thinking, as 
well as of the importation of ideas from foreign 
sources, to say nothing of local environment. 
There are many straws indicating a more or less 
pronounced tendency back to fundamentals, trace- 

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able to English origins, after they have been 
stripped of some external appendages, which, not 
being vital to the underlying truth, have not been 
able to survive the rigors of criticism. One may 
be mistaken in this conclusion, when one is so 
close to the dust of battle; but an observation cov- 
ering the whole period of active teaching from 
the first awakening in economics in this country 
(about 1878) to the present time must certainly 
have some value. 

In addition, the restless energy of American 
industrial life finds its counterpart in the treat- 
ment of economic study. Out of the combination 
of forces mentioned above has arisen an attitude 
of mind which has a distinctively American quality. 
No authoritative writer, no sacrosanct doctrine, 
no prestige of years, protects any part of economic 
results from criticism or attack; indeed, radical 
reconstructions are the order of the day. Never 
was the creative ferment more active than it is 
at the present time. The repressed capability of 
the American nature for economic analysis, which 
marked the first century of our existence, seems 
only to have added to the spirit and intensity of 
our existing interest in working out constructive 
problems in economics. The very fact that there 

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STATUS OF ECONOMIC THINKING 

is a tendency to throw over all accumulations of 
past scholarship is itself a reason why our think- 
ing is not likely to be stereotyped. Eagerness, 
energy, industry, and audacity are now as apparent 
in our economic thinking as in our industrial life. 
The environment is again influencing our intel- 
lectual processes, but in a way different from its 
action in our earlier period ; then, our surroundings 
prevented leisurely examination of the inevitably 
abstract nature of fundamental economic prin- 
ciples; but already the accumulated wealth of all 
parts of our country has given opportunity for 
scientific reflection through the creation and 
endowment of universities wherein economics 
demand and receive marked consideration. 

In another way our scientific progress in eco- 
nomic thinking has been affected by our environ- 
ment, through its influence upon the quality and 
ability of professional economists. As has been 
remarked elsewhere, the men of greatest ability 
are likely to be attracted by the phenomenal 
rewards of business life; and those who prefer an 
academic career are, therefore, not in all cases the 
fittest members of the community. As yet, a 
position as instructor in a college or university 
carries with it no dignity, and little honor; and 

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INDUSTRIAL AMERICA 

such a man is practically regarded with an attitude 
of condescension by the successful men of affairs. 
When our standards become less material, and 
when more value is put upon intellectual achieve- 
ment, possibly these conditions may be altered. 
As matters stand now, there is no reason for 
pride in the mental power of the general body 
of thinkers in economics. With obvious ex- 
ceptions, there is a great deal of mediocre 
work. Men in political economy are, of course, 
human beings, and exhibit the peculiarities of 
human nature that exist the world over; but it is 
a question whether the scientific frame of mind 
is not too generally sacrificed to the demands of 
personal feeling, or to the assumptions of self- 
constituted groups. Doubtless, in that respect, 
we do not differ much from the rest of the world 
of scholars; and it is perhaps too much to expect 
that an honest scientific study should receive as 
impartial treatment at home as it is likely to 
receive in Europe. Time, however, will give the 
correct verdict. 

IV 

Since General Walker first attacked the wages- 
fund doctrine in 1875, there has been a very 

230 



STATUS OF ECONOMIC THINKING 

distinct tendency to treat the questions of wages 
and interest from the point of view of productivity. 
The influence of demand and supply, which was 
the real principle behind the English treatment of 
the wages question — wherein demand was vaguely 
defined as equivalent to capital — was put in the 
background, and productivity was brought to the 
fore. In this explanation productivity meant 
the productivity of the industry as a whole, and 
not that imputed to any one factor, such as labor, 
or capital, in production. The attempt by General 
Walker to show that the increased product of 
an industry necessarily belonged to the labor- 
factor as a residual claimant was due to the neces- 
sity of finding some other determining principle 
for wages than demand and supply. The obvious 
deficiency in this solution, and one apparent to 
the man of affairs, lay in the omission to regard 
other factors than labor as accessory to the in- 
creased output. That the full amount of the 
increased product of industry, moreover, has in 
the long run gone to labor is a claim which no 
historian of economics would wish to father. 

In the reaction against the wages-fund theory, 
writers like F. A. Walker and Henry George 
devoted much space to showing that wages were 

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not paid out of capital. Such inquiries, however, 
are of service only in disclosing how wages are 
paid, or the machinery by which the wages are 
passed to the laborer; they do not throw any light 
on the pivotal principle which determines, not 
how, but how much wages will be paid. We 
wish to know what determines the amount paid 
in wages, not in general, but in particular, cases. 
Therefore, when Henry George declared that the 
miner underneath the ground is producing his 
wages in the ore sent to the surface, and that he 
is paid out of his product, he must be regarded as 
dealing in hyperbole. He fails to see that one 
must distinguish between present goods, ready 
for consumption by the laborer, and the future 
goods, which form the product on which he is 
engaged. How far the value, or change in the 
quantity, of those future goods directly determines 
the quantity of present goods which the laborer 
will receive for his effort, Henry George has not 
advised us. In developing his conclusion that 
payments for natural agents, in the form of rent, 
are necessarily subtracted from wages, his logic 
is seriously defective. His conclusion that the 
unearned increment from land should be taxed 
was anticipated by Mill's proposals; but George's 

232 



STATUS OF ECONOMIC THINKING 

single-tax scheme is a non sequitur to any logical 
analysis of his system of distribution based on 
productivity. 

The incompleteness of a theory of wages which 
made demand for labor synonymous with capital, 
and which drove American economists to seek a 
solution in productivity, led J. B. Clark, the 
scholarly professor of Columbia University, New 
York, to a life-long study upon this subject. 
While emphasizing the essentially dynamic char- 
acter of economic phenomena, his philosophy of 
wages and interest is based on a theory of product 
tivity. He was quick to see the difference between 
the productivity of industry as a whole and the 
productivity of any factor of production, like 
labor, or capital, taken by itself; and he must 
have realized that previous writers had not made 
out a defensible connection between the product 
of an industry, taken as a whole, and the amount 
necessarily accruing to each factor separately. 
The method of Professor Clark involved the 
feasibility of tracing to each factor in production 
its own addition to the united result, and of 
measuring that special productivity by a definite 
unit. This adventure depended for success not 
only upon assumptions regarding marginal utility 

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and the separateness of the economic factors, 
but also upon the soundness of the method of 
discovery used. To dissect the joint result of 
an industry, and to indicate by practical rules 
just what part is due to labor, capital, manage- 
ment, and natural resources is a difficult task, 
and recalls Cairnes's famous remark in this same 
connection: "A master- tailor supplies a sew- 
ing-machine and cloth; journeymen tailors go to 
work on these articles, and a suit of clothes is the 
result — what proportion of the clothes is to be 
credited respectively to the machine and to the 
workmen? It is only necessary to propound 
such questions to perceive that they are absolutely 
insoluble. As well might one seek to determine 
the proportions in which the oxygen, the hydrogen, 
and the electric flash have contributed to the drop 
of water which results from their combined 
action." 1 Professor Clark is trying to obtain a 
marginal unit of productivity for each factor; 
and, in addition, his whole reasoning involves the 
validity of the marginal theory of value — as to 
which some economists are beginning to raise 
serious doubts. Professor Clark assumes one fac- 
tor to be variable, while the others are constant; 

x Leading Principles of Political Economy, p. 268. 
234 



STATUS OF ECONOMIC THINKING 

thus, changes in the product, under such con- 
ditions, are to be assigned to the operations of 
the variable. For instance, supposing capital and 
other factors to be constant, he adds labor until 
the last increment produces a minimum which 
makes the employer indifferent whether the 
laborer goes or stays. This is the final produc- 
tivity of labor, when it is "made to work virtually 
unaided." One difficulty, among others, is that 
this marginal laborer is in reality working every 
minute with all the appliances of capital and 
resources, and not " unaided." What he could 
do without capital, and "unaided," is not to be 
determined by work done with the assistance of 
all the forms of capital. 

Coming after J. B. Clark, Professor T. N. Car- 
ver, of Harvard, also seeking a measure for the 
productivity of each separate factor, has gone 
further than the former in trying to reconcile 
the admitted effects of productivity on wages with 
the equally unmistakable effects of demand and 
supply. To serve his purpose, he also finds it 
necessary to prove a law of diminishing returns 
operating on labor and capital separately. His 
reasoning, by which he tries to establish a mar- 
ginal productivity of labor distinct from that of 

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any other factor, and which would equal his rate 
of wages, is as unsatisfactory as Clark's; for he 
admits that the loss of all of any one factor "would 
destroy the product altogether. " Moreover, in 
trying to apply the law of diminishing returns to 
capital, the facts are stretched to suit an a priori 
theory. The difficulty here undoubtedly lies in 
forcing the law of satiety, which makes diminish- 
ing utility the inevitable consequence of increasing 
supply, out of its psychological field into a mechan- 
ical field in which it is not applicable. That is, 
diminishing utility is a psychological phenomenon 
applicable to states of mind, in connection with 
personal consumption, but not applicable to me- 
chanical, or concrete, relations such as exist in the 
forms of capital in connection with production. 
While an increase in the number of apples eaten 
diminishes their utility to the consumer, an in- 
crease in the forms of capital does not necessarily 
diminish in effectiveness when properly adjusted 
to relative needs. Therefore, while Professor 
Carver has recognized the influence of supply 
together with productivity in determining wages 
— even though the exposition of the theory of 
interest is defective — one is inclined to think the 
attempt to determine wages by marginal produc- 

236 



STATUS OF ECONOMIC THINKING 

tivity is too metaphysical, even if correct, to be of 
any real value for a system of practical economics. 

From such examples as these it will appear how 
strong the tendency is in this group of economists 
to cultivate speculative economics. This charac- 
teristic is marked in a virile and well-studied 
treatise on political economy, by Professor F. A. 
Fetter, of Cornell University. Not only does he 
also use the marginal productivity of labor as 
the law of wages, but, following Clark, he 
merges the concept of capital with that of land 
and arrives at a law of rent common to both. 
His work is strong, and demands careful think- 
ing; it shows plainly how present-day writers 
have passed from the traditional pathway to new 
and constructive ventures. 

The treatment of the rate of interest as essen- 
tially the same as a species of rent responds to 
the earlier suggestion of Professor Irving Fisher, 
of Yale. Recent writers are, as it will be seen, 
attempting to recast the concept of capital. In 
fact, there is a distinct breaking away from the 
old ground and a movement on to an experimental 
trial of all sorts of new theories. With it all is 
to be found a metaphysical emphasis on questions 
of value in which the Austrian- Jevons analysis 

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of marginal utility receives very considerable sup- 
port. Indeed, so far has the marginal-utility 
nomenclature spread over modern economic trea- 
tises that the intelligent layman could not possibly 
follow the discussions. This is an unfortunate 
result of the unmistakable ferment in economic 
thinking; and one is forced to believe that, when 
any real truth has been arrived at, it can be 
stated in simple, comprehensive language. One 
is also obliged to express the opinion that the 
concentration of time and thought upon specu- 
lative questions of value which properly belong 
to psychology, will result in little gain to the body 
of economic principles; nay, more, that this in- 
clination toward the speculative side of economics 
stands in the way of a needful progress in our 
main scientific formulations. 

Professor S. N. Patten, of Pennsylvania, while 
adhering to the deductive method, has travelled 
far into a philosophical world of his own, in 
which a theory of prosperity and an economy of 
pleasure and pain is worked out. His emphasis 
is also on the speculative side of economics. 

An important influence is to be assigned to 
President A. T. Hadley, of Yale, whose text-book 
covered the general theory of economics. In his 

238 



STATUS OF ECONOMIC THINKING 

study of wages and interest, however, his results 
do not differ largely from the main conclusions of 
Mill and the English school. 

Happily, there seems to be energy enough left 
over from abstract studies to spare for active in- 
vestigation into the practical questions of money, 
banking, railways, trusts, tariffs, labor unions, 
socialism, and taxation. The exigencies of politics 
and the ebb and flow of public interest are suffi- 
cient reasons for a perennial discussion of these 
topics, and economic students are receiving an 
increasing authority, as their work grows in prac- 
tical value and thoroughness, when they treat 
these matters. The life infused into the question 
of money by the Civil War has never expired; 
and while the greenbacks and silver coinage have 
ceased to be political issues, the substantial nature 
of the questions raised has led to detailed and 
solid contributions to fundamental problems of 
money. The old doctrine that prices were largely 
determined by the quantity of money in circulation 
has been assailed; and the need of a restatement 
of those parts of economic treatises dealing with 
money, credit, and the international movement 
of specie has been shown. In fact, the attention 
to the primary principles of money by several 

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INDUSTRIAL AMERICA 

writers, such as Scott, Kinley, White, Andrews, 
Mitchell, and others, is healthy and significant; 
and public thinking has been thereby influenced. 



In spite of the intellectual ferment among 
economic students, in spite of much admirable 
writing intended for popular consumption, it 
remains true that the professional economists 
have very little influence upon the convictions of 
the great body of our people. The writing and 
the discussions upon money may have had more 
or less influence upon the disappearance of the 
greenback and the silver manias; and yet it is a 
question whether the logic of events, such as the 
large crops which assisted our resumption of 
specie payments in 1879, or the recent large pro- 
duction of gold, has not been more directly re- 
sponsible for the modification of public interest on 
these monetary questions. In this, as probably 
in all other countries, the transmission of scientific 
results to the thinking of the general public must 
always be indirect and slow. Yet, in the United 
States, the low estimate put upon the teacher, and 
the high value set upon material success, have 

240 



STATUS OF ECONOMIC THINKING 

made the process of transmission more difficult 
than it should be. The business man, as a rule, 
looks upon the professional economist as a theorist; 
and, when one is met by the metaphysical sub- 
tleties in some of the treatises mentioned above, 
there is more or less basis for this point of view. 
But the slight regard for the work of economists 
is not confined to the unintelligent. When the 
present writer was serving on a certain commis- 
sion the suggestion was made that the task of 
drawing up the report should be assigned to him. 
However, opposition was made on the ground 
that, although the writer had been a business 
man, if it became known that the report was 
written by a professor its usefulness would be 
destroyed with the men of affairs. The objec- 
tion, too, had a real basis. 

Possibly the reason for such a state of mind is 
to be found in the general lack of knowledge and 
training in economics. If it is supposed that 
economics aims only to teach men how to ac- 
cumulate wealth, those of certain ideals are likely 
to be disappointed in its results, and the subject 
will be regarded as useless. Moreover, the wide 
differences of opinion among the economists is 
regarded by some as proving that there is little 

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worthy of respect in its teachings; as if the exist- 
ence of the great variety of models in automobiles 
would be an argument against having some one 
automobile. Again, the fact that very few econ- 
omists have supported the extreme policy of 
American protection has demanded a show of dis- 
belief in the value of economics, at least on the 
part of those engaged in moulding public opinion 
in favor of protective tariffs. I have heard a 
protectionist speaker, afterward President of the 
United States, heap satire and insult upon pro- 
fessors of political economy as a class. 

It is conceivable that a wide-spread lack of 
confidence in professional economists on the part 
of the business world may be attributed to an 
infusion by them of sentiment into the solution of 
certain questions. Whenever conditions are not 
what they should be, some men are filled with an 
admirable apostolic fervor to make things right. 
With their purpose there can be no disagreement; 
but it is possible that their means are insufficient, 
or that a policy is urged which is based on a 
faulty economic analysis. The introduction of 
ethics into economic questions is by no means to 
be deprecated; quite the contrary. But before 
we have our economic analysis of forces, before 

242 



STATUS OF ECONOMIC THINKING 

we know what is, it would be foolish to prescribe 
what should be applied to bring about what ought 
to be. In America we have many whose hearts 
are larger than their heads— whose passionate 
desire to remove suffering and poverty is un- 
attended by the capacity for correctly analyzing 
economic conditions. A theory of ethics springs 
up which formulates practical rules of action 
based upon individual experience and inability 
to look below the facts of daily life. As a con- 
sequence a wide-spread distrust exists with regard 
to many who pose as economists, but who speak 
with a certitude in inverse ratio to their insight. 
No doubt such persons do much damage by the 
incorrect views they spread among the laboring 
classes, and by the contempt which they bring 
down upon the science of economics (which they 
are supposed to know). These pseudo-economists 
are most to be heard in lecturing to audiences, 
untrained in economics, and whose emotions are 
easily stirred by descriptions of what is wrong. 
Such rainbow chasers, however, are always a pic- 
turesque part of the situation, and help to draw 
attention to economic study. 



243 



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VI 

While each individual has a more or less de- 
veloped code of ethics, sufficient unto himself, 
sometimes there arises a cult whose beliefs, while 
differing widely in themselves, have some com- 
mon basis of agreement. A loose union of eth- 
ical, political, and economic tenets, more or less 
vaguely reasoned out, but animated by a common 
feeling of discontent with the existing economic 
conditions, seems to lie behind the thinking of 
the American Socialists. Their point of contact 
with scientific economics is not easy to define. 
Socialism with us is not necessarily opposed to 
individualism; in fact, extreme individualism is 
the mother of Anarchism, and Anarchists are 
very often only embryo Socialists. As a rule, our 
Socialists retain a belief in some organization of 
society, thereby differing from the Anarchists; 
but the common socialistic tenet is the abolition 
of private property. 

The origin of Socialism in the United States 
is not to be assigned to German, but to American, 
influences. As the most recent socialistic propa- 
ganda is fathered by literary men such as T. W. 

244 



STATUS OF ECONOMIC THINKING 

Higginson and Jack London, so the earlier move- 
ments of Fourierism and Brook Farm found 
followers among the best minds of the day. To 
be sure, new-comers from the Old World, imbued 
with Marxianism, brought aid and comfort to 
this point of view; but little serious attention is 
now given to Marx's theory of labor value as a 
basis for attack on the existing forms of society. 
In fact, America has been regarded as a favor- 
able experimental ground for trying any and all 
sorts of new schemes. Thus we have had, on 
the one hand, religious organizations such as the 
Shakers and others; and, on the other hand, the 
colonies of Owen, and the followers of Cabet at 
Icaria. All but the religious experiments have 
failed, the Icarians having disappeared from Iowa 
about ten years ago. French thinking, it will 
thus be noted, has been quite as influential as 
any foreign source of ideas. 

Apart from the common desire to abolish 
private property, and the general acceptance of 
some form of organization, it would be difficult 
to describe the tenets of American Socialism. 
They vary with the conditions of business, with 
the personal influence of some leader, and with 
geographical situation. The panacea of Socialism 

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is urged as a means of escape from the ills of soci- 
ety. Poverty, lack of employment, and the lack of 
opportunity are charged upon the existing forms 
of society, rather than upon the usual character- 
istics of human nature. Since crime is in the 
main an offence against property, since the desire 
to obtain property is the cause of unprincipled 
treatment of others, and since the possession of 
wealth gives enormous power which is sure to be 
abused, the Socialist holds that the abolition of 
property would remove the main incentive to 
wrongdoing which now degrades society. On the 
other hand, he does not have much to say regard- 
ing the probability that human nature will mani- 
fest itself in quite the same way whether the ex- 
ternal forms of society are changed or not. The 
essence of his faith lies in the hope that men may 
be made better by externals, or by "social power" 
(whatever that may mean), rather than by the 
present system which demands self-control, force, 
and adjustment to men and surroundings. The 
existing institution of property at least keeps men 
to a conventional system of morals, if they wish 
to win material success; and exacts the price of 
industry, energy, concentration, good judgment, 
foresight — all industrial virtues — as the payment 

246 



STATUS OF ECONOMIC THINKING 

for such success. A theory which, with the aboli- 
tion of property, would abolish all these virtues, 
in return for a hope that men would all be 
good under an untried regime, shows the intel- 
lectual pride, if nothing more, which appears 
in the socialistic proposal. Since these points 
are quite as well understood in Germany as with 
us, it is unnecessary to explain further on this 
topic. 

The concentration of population in our cities 
obviously brings under observation more cases 
of ill-success than elsewhere, and consequently 
discontent is there more likely to seek an outlet 
in schemes for the abolition of property. The 
inability to assign ill-success to individual deficien- 
cies, rather than to the social system, grows with 
the opportunities of the unsuccessful to compare 
their grievances; with numbers, the suspicion as 
to a remedy grows into the form of absolute 
conviction. The cities are the strongholds of 
Socialism, where organization and conference are 
easy. Here the Socialist vote is greatest; although 
the number of Socialists is probably much larger 
than the actual vote polled. In Chicago, which 
contains as strong a socialistic element as any 
other city, out of a total vote in 1904 of 364,004, 

247 



INDUSTRIAL AMERICA 

the Socialist candidate (Debs) received 45,929, 
or about one-eighth. 

There are, of course, many very honest and 
intelligent Socialists; but the spread of their beliefs 
is closely connected with a discontent with material 
success. In times of depression, or when the 
discussion of great wealth is most lively, we hear 
most of their doctrines. Moreover, a theory 
based on the abolition of property finds no great 
support among our farming communities where 
property is widely diffused. In the older States 
this is measurably true; but in the Southwest, the 
district where frontier conditions yet prevail, and 
where men who possess little, or who have failed 
elsewhere, have come "to grow up with the 
country," the jealousy of the poor against the rich 
is very strong. This social discontent has led 
to a quasi- Socialism, under the name of " popu- 
lism.' ' Social conditions, rather than individual 
deficiencies, are held to be responsible for ill- 
success in life; and the unsuccessful would like 
State aid to start them toward prosperity; but they 
have not advanced far enough from the Anglo- 
Saxon love of property to advocate its abolition. 
Their dissatisfaction is largely due to the fact that 
they have not property enough. 

248 



STATUS OF ECONOMIC THINKING 

When we turn to the body of workingmen who 
make up the labor unions, it will be found that 
there is a natural drift toward Socialism. They 
do not, of course, proclaim any general views of 
society; but the literature they receive, and the 
thinking which most nearly influences them, is de- 
cidedly socialistic. Organizations created to raise 
the standard of living clearly reflect a discontent 
with existing economic conditions. To them, 
however, the immediate remedy is a rise of wages; 
and so general a panacea as the abolition of 
property is too remote to influence their beliefs 
in most cases. Hence, a very large and intelligent 
body of labor unionists will be found ready to 
vote down Socialist resolutions. 

It is the habit in America to use the word 
" socialistic' ' of any interference of the State, as 
in the case of the tariff; but it is to be noted, at 
the same time, that the true Socialist regards 
paternalism with strong dislike, and as merely a 
way of strengthening the hold of property upon 
the political system. To make amelioration of 
social conditions depend upon the means pro- 
vided by a regime of private property is only to 
emphasize the value of that which ought to be 
destroyed. 

249 



INDUSTRIAL AMERICA 

VH 

When we pass from Socialism to Anarchism, 
from those who believe in organization of the 
State in order to control industry to those who do 
not believe in any organization at all, we reach 
a smaller and a more heterogeneous body. Nor 
is our Anarchism altogether of European im- 
portation. As was observed before, it may be 
the legitimate offspring of an extreme individual- 
ism. The original nest of American anarchism 
was in Boston, whence came many anarchistic 
suggestions during the discussions upon the 
abolition of slavery. Benjamin Tucker is both 
Anarchist and individualist. Another group, 
scattered sparsely over the length and breadth of 
the land, protest against all restrictions of social 
organization ; they do not want any control, even 
for industrial purposes. The Chicago Anarchists 
are a scattered company of men with a grievance, 
very loosely articulated in any system. Their 
repute is largely due to the Haymarket massacre, 
for which Parsons and others were hung as an 
example to violators of the law. Parsons himself 
was a New Englander, and a Marxian; but while 
holding to a sort of Socialism, he was a believer 

250 



STATUS OF ECONOMIC THINKING 

in the abolition of all government. Among the 
militant Anarchists, however, are to be found 
many Italians and Poles. 



vm 

The "professional Socialists" (the Katheder 
Socialisten) have a considerable influence in the 
United States. In urging the power of the social 
organism as a means of removing existing wrongs, 
they touch a responsive chord in the breasts of all 
those who have not obtained material rewards; 
and they sometimes raise expectations which can- 
not be fulfilled. In our politics it is not unusual 
to tell the workingmen that, if they will vote for 
one candidate for the presidency, their wages will 
be raised, or that they will have a "full dinner- 
pail." The hope of getting something from the 
State, without the sacrifices and seasoning of 
character arising from personal exertion, is com- 
forting and pleasant, even though it cultivates 
the habit of dependence on outside assistance. 

More recently this doctrine has lain behind the 
movement for municipal ownership of various 
public, or quasi-public, utilities. It is in essence 
an attempt to fly from ills we know to those we 

251 



INDUSTRIAL AMERICA 

know not. The abuses in methods of granting 
franchises for gas, street railways, and the like, 
are not denied ; but it is denied that municipalities, 
which have proved themselves unfit to protect 
the public in making deals with private companies, 
are likely to be fit to carry on a large business 
corporation successfully. Until the spoils of office 
are eliminated from municipal politics, as they 
are in Germany — and as sometime they will be in 
America — it is folly to propose municipal owner- 
ship. To settle the question fairly, the results 
of municipal ownership under honest and com- 
petent guidance should be compared only with 
the results of private management under an 
intelligent and honest city government. 

There is an insidious plea in the propaganda 
for municipal ownership which draws to its sup- 
port the man who is at the bottom of the ladder. 
He is led to think that there is something in it for 
him personally; that, if the municipality takes 
on itself new and large enterprises, he may get 
employment when he has been unsuccessful else- 
where. Obviously, if municipal undertakings are 
the refuge of men who could not succeed in 
private industry, then their cost will be greater 
than if managed under a competitive private 

252 



STATUS OF ECONOMIC THINKING 

system, and the taxpayer must carry the ad- 
ditional burden due to municipal incompetence 
or corruption. 

IX 

The great body of labor unionists seem to be 
little influenced by the thinking of professional 
economists. Indeed, one might rather say that 
many of the professional economists have been 
influenced by the thinking of the labor unionists. 
Just as the economists have had an insignificant 
effect on the policy of the Government, so those 
who have most deeply studied wages, like Clark 
or Hadley, cannot be said to have impressed upon 
the workingmen any scientific conclusions from 
economics. In the United States serious study of 
economics is yet young; and the great body of 
the people have never been trained in economic 
principles. First of all, the public men and the 
newspaper writers must become conversant with 
economic studies; but as yet most of these influen- 
tial persons have picked up their economic training 
only in the intervals given to other things in a 
crowded and busy existence. The tide is turning, 
however, and better things may soon come in. 

The great public becomes educated in economics 

253 



INDUSTRIAL AMERICA 

chiefly through the concentration of a political 
campaign upon some subject like money, the 
tariff, or railways. To-day the general opinion 
upon silver coinage is sound and conservative; 
but the logic upon which it is based is doubtless 
far from sound. The inability to touch the 
banking system intelligently in Congress, and the 
prevalent hostility to banks, is a mark of crudity 
and prejudice which will be long in passing away. 
This suspicion of banks is but a part of the 
wider hostility to "the money power," an un- 
defined antagonism to the wealthy classes. In 
short, the feeling that the interests of the poor 
and the rich are widely opposed is unmistakable. 
It finds expression in the phrase of "the masses 
against the plutocrats." While one may assign 
this to the jealousy of the unsuccessful toward 
the successful, it is also claimed that this critical 
opposition is really directed, not against wealth 
itself, but against the dishonorable means by 
which some fortunes have been made. The high 
regard in which the late Marshall Field was 
held, although he had accumulated a fortune of 
perhaps $100,000,000, goes far in this direction. 
But whatever the cause, a very wide-spread an- 
tagonism to large corporations, trusts, railways, 

254 



STATUS OF ECONOMIC THINKING 

and the like, certainly exists, and is skilfully used 
by politicians to carry themselves into office. This 
body of beliefs, rash, impatient, cocksure, hon- 
est, shows very little trace of systematic economic 
study. 

The nebulous, untrained thinking of this gigan- 
tic electorate in the United States, taken in con- 
nection with the unmistakably mercurial temper- 
ament of Americans, accounts for the frequent 
political surprises which sometimes puzzle the 
best observers. When the public, comparatively 
untrained, but forceful and energetic, moves under 
some common impulse the effect is overwhelm- 
ing. Force is the preeminent characteristic of 
the American people. With this goes an abiding 
optimism, and a belief that the ideal thing will 
soon come to its own. Whatever their faults, 
the great body of Americans are honest and sound 
to the core. The disclosures of " graft" in high 
finance, and in some political circles, are super- 
ficial .spots of dirt on a big and healthy organism. 
We are ashamed of them precisely because we are 
at heart honest and clean. 

The spread of economic training is going on 
rapidly. No statement about the United States 
stays true more than a very few years. The day 

255 



INDUSTRIAL AMERICA 

is soon coming when the economist will be known 
of the people. The thinking of the expert will 
not be far removed from the thinking of the in- 
telligent leaders of public opinion; and the Galileo 
of the future is not so likely to be scoffed at by 
a doubting populace. 



256 



INDEX 



Agricultural products, why ex- 
ported, 3; "Industrial Revolu- 
tion" in, 4-6; schools, 12. 

Anarchism, origin of American, in 
Boston, 250; characteristics of, 
250. 

Asset, currency, 203, 206, 207; ob- 
jections to, 208-212. 

Banks in United States, 184; early 
history of, 184-186; and credit, 
192; reform of, 192; produce best 
medium of exchange, 193-195; 
profit of, 198; New York, and 
stringency, 215; and promotions, 
218-221; suspicion of, 254; Eng- 
lish Bank Act, suspension of, 
202. See also National Banks. 

Basing points, on railways, 154, 
156. 

Bryan, W. J., 45, 63. 

Callings, private and public, 136. 

Calumet & Hecla mine, 17. 

Campbell methods, without irriga- 
tion, 6. 

Canal, Erie, 147; railway compe- 
tition with, in United States, 148. 

Carnegie Steel Works, 20. 

Cattle industry, 6. 

Chamberlain, J., 56, 



Clearing-house certificates, 201. 

Cleveland, G., 40, 62, 63. 

Competition, brings forth most fit, 
106; danger of monopoly under, 
120; due to growth of capital, 
123; potential, in restraint of 
high prices, 133; maintenance of, 
138; readjustments by railways 
under free, 147; no real attack 
on, 182; of railways with canals, 
148. 

Competition with Europe, general 
causes of, 1-2, 9; agricultural, 3; 
manufacturing, 9; how affected 
by education, 10-12; by taxa- 
tion, 12-14; by railway rates, 15; 
by gifts of nature, 16; by inven- 
tions, 19; by efficiency of labor; 
21; by managerial capacity, 26, 
and tariffs, 50-51. 

Cotton, 17, 47, 48; exports of, 143; 
superseded by wool, 49. 

Deposit-currency, 193-195; based 
on goods, 195; not outcome of 
legislation, 198. 

Differentials, on railways, 157. 

Economic thinking in United 
States, 222-256; before Civil 
War, barren, 223-225; ferment 



257 



INDEX 



caused by Civil War, 225; influ- 
ence of Germany on, 226; reac- 
tion of, against English school, 
227; effect of inheritance and en- 
vironment on, 227; counterpart 
of industrial life, 228; present ac- 
tivity of, 228; attractions away 
from academic life, 229; ten- 
dency to the speculative side, 
237-238; interest in practical 
problems, 239; academic men 
have little influence on people, 
240; reasons for this, 241-243; 
sentimental school, 242; public 
educated in, by political cam- 
paigns, 253-254; hostility to 
money-power, 254; public igno- 
' rant, mercurial, but honest, 255; 
growth of economic thinking, 

255- _ 

Education, effect of, on competition, 
10; of artisans, 11; of employers, 
11-12; elementary, 24; public 
school, 24; college, 10; techni- 
cal, 24; Morrill Act, 28. 

Elastic currency, 193; deposits as 
best, 198, 200; in time of panic, 
200, 217; bond-secured notes, in- 
elastic, 205; amount of notes not 
related to capital of bank, 207. 

Elasticity of different kinds of 
money, 213-214; would not pre- 
vent loan expansions, 216. 

Exports, American, rise of, 31 j to 
what due, 66. 



Free list, 41, 43, 66. 
Fritz, John, 20. 



Government ownership of railways, 
140-142, 181-182. 

Industrial Democracy, 94. 
Internal revenue duties, how re- 
lated to protectionist policy, 35, 

37- 

Interstate Commerce Commission, 
attitude on long and short haul, 
153, 169; on geographical advan- 
tage, 155; power to make rates, 
162, 168, 174, 175, 176; super- 
vision by, 173. 

Inventiveness in America, 19-21; 
of managers, 30. 

Iron and steel, 47, 48. 

Jones, William, 20. 

Labor, problem, 67; labor-force in 
United States a conglomerate, 
68; class feeling, 68; wages of, 
doubled since 1840, 69; progress 
of, in fifty years, 70; causes of 
discontent of, 70; present de- 
mands of, 72; basic ideas of these 
demands, 77; relation to large 
fortunes, 78; rigidity of views of, 
78. 

Labor, efficiency of American, 21 
-26; relation to prices, 22; rela- 
tion to institutions, 23; stimu- 
lated by social prizes, 23; affected 
by standard of living, 24; influ- 
enced by idealism, 25. 

Labor Unions, gains of labor not 
due to, 69; closed shop, argu- 
ments for, 74; open shop, argu- 



258 



INDEX 



ments for, 75; relation to Social- 
ism, 79, 95; making work, 80; 
based on theory of monopoly of 
supply, 81; why non-union men 
always exist, 82; admission to, 
83; demands of, how enforced, 
84; evil leaders of, 90-93; in pol- 
itics, 92; and the theory of pro- 
ductivity, 98; little influenced by 
academic economics, 253. 
Lake Superior ore deposits, 16. 

Managers, of first importance, 27; 
have country's best abilities, 29; 
in promotions, 129; education 
of, 12, 28. 

Manufactured articles, why ex- 
ported, 7; groups and kinds of 
exports, 8; causes of successful 
competition with Europe in, 9. 

McKinley, 45, 46, 59. 

Monopolies, State, 137. 

Municipal ownership, 96; related 
to Socialism, 251. 

National Banks, origin of, 186; 
general provisions of system of, 
187-190; growth of, 1865-1905, 
190; compared with European 
banks, 191; increase with wealth 
of country, 199; inelasticity of 
notes of, 203, 204, 205, 206; re- 
peal of $3,000,000 clause, 212; 
and Treasury, 212; sound con- 
dition of, 221. 

New York as a market, 149. 



Open door, 65. 



Panama Canal, 65. 

Political power, seat of, in United 
States, 53. 

Pools, 101. 

Productivity theory, of Walker, 
231; of George, 232; of J. B. 
Clark, 233-235; of Carver, 235. 

Promotions, 127; valuation of in- 
dustrial, 127-131; over-capitali- 
zation of, 130; furor for, 130; 
and panics, 131. 

Protection, and railway rates, 163, 
165; and scientific economics, 
242. 

Protectionism, high, adopted with- 
out discussion, 37; reaction 
against in 1892, 42; saturnalia 
of, 45; origin in greed, 51; work- 
ings of, 52; and politics, 52, 58; 
and corruption, 53, 55; in Eng- 
land, 57; and the press, 59; and 
labor unions, 59; strategy of, 61; 
and the money question, 62. 

Railways, 140; essence of, prob- 
lem, 147, 156, 164; mileage of 
United States, 140; enabled pop- 
ulation to move West in 1873 
and 1886, 142; effect on value of 
land, 144; aid to manufacturers, 
145; long and short haul, 153; 
State Commissions, 164; and 
shippers, 165; dependence upon, 
141; change in equipment of, 
150; train loads of, 150; cause 
decentralization of trade in Unit- 
ed States, 152, 154; and high 
finance, 166; Elkins Act on, 
167; capitalization of, 180. 



259 



INDEX 



Railway combinations, 177, 179; 
and Supreme Court, 180. 

Railway rates, as touching compe- 
tition, 15; decline of, 1872-1900, 
143; gave European market to 
farmers, 144; on vegetables and 
fresh meat, 146; effect of inven- 
tion on, 148; distance, 148, 155; 
wholesale and retail, 150; effect 
of waterways on, 150; inequality 
of, 156, 158, 159, 167; rivalry of 
places as to, 157, 172 ; commodity, 
160, 161; discriminations in, 162, 
166; and protective duties, 163; 
and refrigerator cars, 167; and 
spurs, 167; complicated, 158, 
159, 167, 171, 176; and Supreme 
Court, 153, 169, 170-172, 174; 
rise in, 1899-1904, 174. 

Reciprocity, 40; in McKinley Act, 
41, 43; essential idea of, 41; how 
dependent on sugar, 43; only a 
pretext, 44; tropical, 45; under 
Dingley Act, 45-47; in recent 
demands by New England and 
West, 65. 

Reichsbank, 207. 

Senate, public estimate of, in 
United States, 54. 

Socialists, in United States, 244- 
249; of American origin, 244; 
tenets of, 245 ; growth of, in cities, 
247; populism, 248; in labor 
unions, 249; how different from 
anarchism, 244; Katheder So- 
cialisten, 251; and municipal 
ownership, 251-252. 



Strikes, statistics of, 86; why vio- 
lence follows, 87; why strikes 
would seldom succeed if order 
enforced, 89. 

Sugar duties, 38, 42, 43, 45, 46, 55. 

Tariff Acts of 1846, 1857, and 1861, 
34; of 1864, 34, 37; of 1870, 38; 
of 1872, 37; of 1875, 39; of 1883, 
40; of 1890, 41; of 1894, 43; of 

1897, 45- 

Tariff system, increases cost of 
materials, 19; helps foreign 
manufacturer, 19; reaction vs. 
McKinley Act, 62; maximum and 
minimum rates, 65; and wages, 
1 3> 59 J an d revenue, 39; and 
prosperity of United States, 50. 

Tariff revision in 1870; how op- 
posed, 60; recent form of, 64. 

Taxation, badly laid, 12; State and 
municipal, 14. 

Traffic associations, 160. 

Treaties, with Germany, 41, 42; 
with Austria-Hungary, 41; re- 
ciprocity under Dingley Act, 45 ; 
Kasson, 46, 65; German "De- 
cember," 47; deadlock with Ger- 
many, 47, 65. 

Trusts, problem of, 100; of recent 
origin, 101; trust proper, 102; 
holding corporation, 104; rea- 
sons for, 105; aim to control 
prices, 106, 121, 122; aided by 
promoter, 107, 126; advantages 
of, 107-114; relations of, to la- 
bor, 114-118; effect of, on inter- 
national trade, 1 18-120; evils of, 



260 



INDEX 



120-126; monopoly of, 121; dis- 
criminations in favor of, 124, 
135; value of securities of, 130; 
control of, 132-139; and the tar- 
iff, 133; and the State, 134; na- 
tional charters of, 135; publicity 
of accounts of, 136; how related 
to Socialism, 137; and railway 
rates, 163; and banks, 215, 218- 
221. 

Unions, see Labor. 



Wages, American, 1850-1900, 70. 

Wages-fund doctrine, 230; fol- 
lowed by theory of productiv- 
ity, 231; Walker and George on, 
231-232. 

Waterways, 147, 148, 151. 

Wheat, exports of, 143; from Rus- 
sia and Argentina, 143; shifting 
of centre of, 143. 

Wool and Woollens, 18, 47, 48; 
number of sheep decreased, 48, 
49. 



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BY J. LAURENCE LAUGHLIN 

Professor of Political Economy in the University of Chicago 



The Principles of Money 

8vo, $3.00 net 

" You have laid the public under very great obligation by 
creating such a work and placing it within their reach. It 
deals with principles, and will be a text-book and fountain 
source from which information and inspiration can be obtained. ' ' 
— A. P. Hepburn, Pice- President Chase National Bank, 
New York. 

(( One of the clearest and most logical of the present-day 
writers on economic subjects, and one whose works can be 
read with most interesting profit by the most ordinary man of 
business." — Journal of Commerce. 

*' His exposition being addressed to laymen, they will find 
in his book wonderfully comprehensive assembling of the 
essential literature bearing on the subject. His discussion on 
price table is particularly full and satisfactory." 

— New York Globe. 

" To a banker it will prove invaluable ; to the layman it 
will act as a teacher, and to both classes it will be found to be 
an educator of great value." — The Financier. 

"A valuable, informing, able and lucid written book. . . . 
Prof. Laughlin is as acute as he is sound and progressive. 
Moreover, his contributions to scientific finance in these divi- 
sions of the work are of great practical significance. ' ' 

— Chicago Evening Post. 



CHARLES SCRIBNER'S SONS, NEW YORK 



BY J. LAURENCE LAUGHLIN 

Professor of Political Economy in the University of Chicago 



The Principles of Money 

8vo, $3.00 net 

*« Prof. Laughlin' s treatise is sane, sober, ponderous and 
important ; a contribution to the great literature of political 
economy, which adds to its intrinsic value the interest of being 
the most recent and perhaps the most ambitious expression of 
American collections on a science hitherto a monopoly of English 
and German philosophers. " — Brooklyn Eagle. 

"The soundness of his views and his ability as a writer 
and a reasoner are well known. If his series of books do not 
attain the rank of the highest standard of authority for a gener- 
ation to come on the subject of money, it will not be for any lack 
of qualification on the part of the author." — Buffalo Express. 

"Mr. Laughlin is perhaps the first American authority in 
his branch of economics on the general subject of money." 

— Pittsburg Gazette. 

" Prof. Laughlin has shown in his former books on the 
money question and political economy a real ability to clarify 
the obscurities of these subjects and correct the many miscon- 
ceptions of the functions of money. . . . The volume is the 
most able commentary and exposition of the principles of money 
which has yet appeared." — Minneapolis Journal. 

"All things considered, this book must be regarded as one 
of the most noteworthy and important economic treatises of the 
year, and it deserves to rank as one of the most profound books 
on money which this country has produced." — Christendom. 



CHARLES SCRIBNER'S SONS, NEW YORK 






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021 899 161 









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